Tesoro Going With Strength

02/15/11 08:16:16 AM

by Donald W. Pendergast, Jr.

Covered-call trading isn't glamorous, but it can be one of the lowest-risk plays as a long-term trend approaches a possible pause point.

Security: TSO
Position: N/A

No doubt about it, shares of Tesoro Corp. (TSO) have been rocketing higher as of late, and any attempt to call a top would seem to be extremely foolhardy. The stock has massive relative strength versus the Standard & Poor's 500 (.SPX) and shows no sign of slowing down in the near term. Figure 1 is a closer look at the price action in this major energy sector player.

FIGURE 1: TSO, DAILY. Strong relative strength stocks in accelerating mode can sometimes form the foundation for successful covered-call trading. This play in shares of Tesoro offers a very high potential annualized rate of return.

Graphic provided by: MetaStock.

Graphic provided by: MetaStock v.11 CS Scientific expert advisor.

The energy sector has exhibited a great deal of strength over the past few months, and that's also a very good sign for further rises in the price of TSO. The stock features accelerating uptrend lines and a wide-range breakout follow-through bar, even as the MetaStock CS Scientific Hybrid Trade Screen continues to confirm the extreme bullish trend and momentum in this issue. It's hard to see any bearish action in the here and now in TSO.

FIGURE 2: TSO, COVERED CALL. With only a three-cent bid-ask spread in the March $24.00 calls and a 46%+ annualized return potential, buying a near-term covered call in shares of TSO might appeal to more than a few traders and investors.

Graphic provided by: Thinkorswim.

The March $24.00 covered-call opportunity also looks very attractive; it's set to deliver annualized gains of more than 46% (before commissions), but only if shares of TSO manage to close in the money in the next 31 days (March 18, 2011). See Figure 2. Given that this is a slightly out-of-the-money play, it might make good sense to place an initial stop somewhere in the region covered by the pink shaded area on the chart; a stop of $21.50 to $21.75 might be a good place to set the initial stop. If the trade keeps rocking higher, alert traders might want to then use the latest uptrend line as their trailing stop-loss delineator for the trade. If you get one or two daily closes below the uptrend line, consider closing out the trade and regrouping for a better opportunity.

By the way, TSO call options also have fairly good bid-ask spreads and solid liquidity, too, adding to the attractiveness of this long trade setup. If you're also bullish on stocks in the energy sector for the next month or so, this could be a very attractive stock/option play to consider.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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Tesoro Going With Strength

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