Wednesday, August 6, 2008

Gasoline Turnaround? Reducing exposure to refiners (VLO, TSO, FTO)

Valero (VLO), Tesoro (TSO), and Frontier Oil (FTO) are my favorite refiners. I use them to play the crack spread. They are ideal for put selling because of high volatility and strong book values (refineries are easy to value at replacement cost times some modifier).

After a 4.3M draw in gasoline inventories vs. 1.3M expected draw, refiners are up ~10%. So I am taking some positions off the table. In particular, FTO Aug 17.5/15 Put spread and TSO Aug 15/12.5 Put spread. I am hoping to sell another similar spread in Sep options on any pullback. If this is actually a turn around, naked puts in FTO, TSO, and VLO will be making money. So I am leaving those on the table as they are several months out and I am near breakeven.

Nice to have a stable day after a massive rally, even if you are taking loses are hedges.

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