Clorox Disinfecting Wipes canisters at the company’s manufacturing facility in Forest Park, Ga.
Matt Odom/Bloomberg
Clorox stock just fell the most in 20 years on a bad earnings report and dour outlook, yet the reason for its previous extraordinary rise may be returning.
The Covid-19 virus—which made Clorox (ticker: CLX) disinfectant wipes and sprays essentially impossible to find until recently—has morphed into an even more infectious form.
The Delta variant is said to make people sicker faster, but that fact is often obscured by America’s culture wars, which have divided the country on almost every conceivable topic. While people argue over the right approach to battling the virus, it is prompting defensive measures around the world—and investors are paying attention.
“Mask on, mask off is the new risk on, risk off,” Michael Schwartz, Oppenheimer & Co.’s chief options strategist, tells Barron’s.
At one extreme, deep-blue New York City will require proof of vaccination from anyone who wants to eat at a restaurant or exercise in a gym. At another extreme, Florida Gov. Ron DeSantis, a Republican, has insisted that the recent Covid spike is a temporary phenomenon. He opposes requiring people to wear a protective mask.
Each approach has its own merits and drawbacks, and there is no need to be drawn into the polemics. Instead, let’s focus on investment themes. Should the Delta variant prove more pernicious—and reports indicate that some hospitals are struggling to treat patients, as happened last year when the pandemic erupted—people will likely rush to buy anything that makes them feel safer.
Aggressive investors looking for a reasonable way to monetize that morbid moment could sell cash-secured put options on Clorox stock to position to buy the shares—or increase their position—at lower prices. (A put gives the holder the right to sell an asset at a specified price and time.)
With Clorox at $165.61, investors can sell the October $160 put for about $4.
Should the stock be above the $160 strike price at expiration, investors can keep the options premium. If the stock is below the strike price, investors can buy the stock at $160, or roll the short put in the options market to avoid having to buy the stock.
During the past 52 weeks, Clorox stock has ranged from $159.32 to $239.87. The stock is down about 18% this year, compared with a gain of 18% for the S&P 500 index. The $160 strike price expresses a view that the stock won’t move into a dramatically lower trading range. The postearnings decline likely wiped out all of the weak hands who bought into the stock to play the first phase of the Covid pandemic. The remaining investors are likely made of sterner stuff.
The risk to the strategy is that something happens that makes the stock plummet far below the strike price. To guard against that, investors should pick a price in their head—a mental stop of, say, $155—and commit to covering the short put or rolling the put to another strike price and expiration.
The cash-secured put sale is a tactical trade tied to the expectation that the Covid pandemic might erupt again. The trade is made in full knowledge of Clorox’s stunningly bad fourth-quarter results and outlook this past week. The company reported a 9% sales decline, and a 68% decrease in diluted net earnings per share. The fiscal 2022 outlook was also bad. The company said adjusted earnings per share would be $5.40 to $5.70, compared with analyst forecasts of $7.67.
On the bright side, Clorox stock pays a nice dividend. The yield is about 2.8%, which isn’t easy to find. If you believe the company is largely stable—despite a very messy quarter and outlook—it could be worth betting on.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
Email: [email protected]
