Around 3 p.m. EDT yesterday, an investor in Valero Energy (NYSE: VLO) sold off the upside of the stock to decrease the cost of downside protection in a long-dated collar spread.

The investor sold the Jan. 2011 12.5-20 risk reversal, selling the out-of-the-money Jan. 2011 20 calls and buying the out-of-the-money Jan. 2011 12.5 puts, 15,000 times for 15 cents with the stock trading at $16.10 a share. The Jan. 2011 12.5 puts, which closed up nine cents on the day, changed hands 20,000 times and were home to open interest of 6,804. The Jan. 2011 20 calls, which dropped 34 cents on the day, were home to open interest of 2,745. Approximately 20,300 of these contracts traded.

Normal daily options volume in VLO is about 25,000 compared to the 53,000 contracts that changed hands yesterday.

The volume weighted average (VWAP) of the Jan. 2011 12.5 puts was $2.30, while the VWAP of the Jan. 2011 20 calls was $2.45. That equates to a net credit of 15 cents for this collar.

VLO stock closed down 53 cents to $16.03, despite the fact that the broader market and commodity-related stocks rallied in general. The downside move in VLO could be the result of a downgrade by Oppenheimer, who lowered their rating to “perform” from “outperform.” This collar is not altogether bearish. Remember, the investor could be long shares against this spread and is truly using the options as a hedge, rather than an outright bet on a decline in the shares. VLO has failed to participate in the rally of the past three plus months, so this could be an argument for the bull case. 

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