Refining my options

Time for idea stealing time again.

I have watched the refiners, shippers and banks fall off a cliff the past few months... just to name a few sectors.

I have also contemplated buying a few times. Then one of my frequented blogs comes up with one of the companies i have done some quick research on Tesoro. Now i have looked at the numbers, compared it to Valero, Sunoco and a few others and know that when oil falls refining margins 'should' get better.

This blog post highlighted some things that i didn't know about Tesoro and its growth prospects. Now if oil prices continue down or remain stable, this i don't know, Tesoro should be a good hold for a few years.

I figured that now would be a good time to look at my 'options' and see what i can do besides just buying shares at todays price.

My first thought was to sell puts. Selling a Jan put with $12.50 strike yields 10% minimum (on initial purchase price) in 2 months with the price staying above $9.7. If it goes to $12.50 i just got $3.7/share for free or 38% of todays $9.7.

A Jan call for $5 strike is $5.2. So anything above $10.2 is all profit and anything below i will have a small or large loss. I get 2-1 leverage with this idea, but it doesn't merit the risk to me since i doubt Tesoro will fall another 50% from here.

I like the Jan '10 calls a little better. $5 strike is going for $6.2, but offers another 12 months of time. Slightly less than 2-1 ratio. If i wanted to buy 200 shares it would cost almost $2000. By using this call option i can control 300 shares for less than $2000. The 4% dividend is not enough incentive for me to buy the 200 vs controlling 300.

For the additional 12 months my time cost is $0.085/month. If Tesoro reachs only $12 by Jan 2010 my return on 200 shares is 28%. Not bad but what happens if i controlled 300 shares.

I lost the $0.40 dividend (which was taxed as income in Canada anyways), but my return was only 12.9%. Hmmm how about $14? 48% for owned vs 61% for controlled. As you can see the breakeven for this trade is around $13.5.

I think Tesoro has a good shot of being $20 or better. The margin gets better as the price goes up. At $20 the return is 110% owned vs. 142% controlled.

read Randolph's blog, from my favourites, as to why you should like Tesoro at these prices.

D