[Options] Keep it Clean!

Sean McLaughlin
March 6, 2020

Things are whippy out there. And volatility is elevated to levels we haven't seen in quite a while. This is no time to be a hero. This is the time to focus on edges and putting them to your advantage.

I know it's sexy to be a buyer of calls if you want to be the hero bottom caller. Similarly, it's equally sexy to be a holder of long puts into a market crash. But this is not the time to be initiating new long calls or puts positions. The premiums you'd pay are so high right now that you could totally nail the direction, but you'd be swimming upstream against an eventual mean-version in volatility pricing.

But this does not mean we pick up our ball and go home. We options traders have options!

In this environment, we're looking for plays where we are net sellers of premium. With premiums this juicy, it would be irresponsible to do anything else.

And so, in keeping with a public safety theme, we're going to take a look a Clorox. No doubt people are doubling and tripling up on hand sanitizers, soaps, wipes -- anything with the words "disinfectant" on them. While that makes for a nice fundamental narrative, we here at All Star Charts are focusing more on the price action and we're liking the setup.

Here's Steve Strazza:

...another popular name, Clorox ($CLX), which was the only S&P 500 component consistently making new all-time highs last week while the rest of the market was tanking. The relative strength in this name has been impressive as it is one of few stocks that is actually higher today than when the S&P peaked in February.

And here's the chart he's pointing to:

Yes, a touch sloppy in recent days, but what hasn't been?

Thanks to elevated premiums, we've got a lot of room to sell out-of-the-money puts in this name and that is precisely what I intend to do.

Here's the Play:

I'm selling $CLX April 160 puts for an approximately $4.70 credit. The goal here is to buy the short puts back for less than half of what I collected. So I'll be looking to buy back below $2.35 per contract.

I'll be sizing my position small, such that if the stock craters and I get stock put to me, the total value of the purchase of $CLX shares at 160/sh (our strike price) will represent approximately 10% of my total portfolio equity. Not being greedy here... being tactical, going for the high probability win.

If $CLX closes below our 160 strike price at any time during this hold, I'll exit the trade and take the loss.

If you have any questions on this trade, email me here.

~ @chicagosean

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