Trade Update CL: Closing Half Dec Put Spread for a Gain, Letting Other Half Ride

by Dan October 25, 2012 10:46 am • Commentary

Trade Update Oct 25th, 2012: CL reported disappointing results this morning and the stock is down 2%, in line with the implied move.  I am going to use this weakness to take half of my Dec Put Spread off for a gain and let the other half ride for a bit…….I think there is a distinct possibility that the stock trades $100 in the next couple months in a flat to declining market.

Action: Sold to close 1/2 CL ($104.18) Dec 105/100 Put Spread at 1.65 for a .55 gain


Original Post Oct 23rd, 2012:

EVENT: CL reports Q3 earnings on Thursday Oct 25th, prior to the open. The options market is implying about a 1.75% move which is basically inline with the 4 & 8 qtr avgs of about the same.  

SENTIMENT:  Wall Street Analysts are fairly mixed on the stock with 8 Buys, 15 Holds and 2 Sells, and an avg 12 month price target of $110.89, or only 4.5% higher than current levels.

Here are my comments earlier today in the MorningWord on CL:

CL is another stock that has perplexed us a bit, with just a 2.3% dividend yield, expected earnings growth in mid single digits this yr, and only 10% a year for the next 2, trading at 20x!!   CL just last week made new all time highs, with sales growth in the mid single digits expected for the next few years, this stock appears to be priced for perfection.  Where the hell is this thing going???

CL chart since Inception from Bloomberg

One last thing about CL, Implied Vol is very cheap, the chart below (blue line 30 day IV, white orange and green are the 30, 60 & 90 day realized) shows that until just last week, CL IV was at or below realized even with earnings due later this week.  CL is generally a very low vol name and given the stock’s steady ascent in such a low vol environment of the last few months, this doesn’t come as a huge surprise, it could serve as a huge opportunity.

CL 30 day IV vs 30, 60 & 90 day Realized Vol from Bloomberg


PRICE ACTION / TECHNICALS:  Stock is up 15.3% ytd, out-performing many consumer staple peers with much richer dividends and lower valuations, and the SPX is only up 12.5%.  Given the performance today by Dow components MMM and DD, it appears that investors are shooting first and asking questions later.

The 1 year chart shows the stock quickly approaching the trend-line that has been in place since early this year.  A break below $105 could see a quick move to support (200 day moving avg at $100).

[caption id="attachment_18463" align="aligncenter" width="490" caption="1 yr CL chart from Bloomberg"][/caption]



MY TRADE: CL ($106.70) Bought the Dec 105/100 Put Spread for 1.10

-Bought 1 Dec 105 Put for 2.15

-Sold 1 Dec 100 Put at 1.05

Break-Even on Dec Expiration:

-Profits btwn 103.90 and 100, make up to 3.90, max gain 100 or lower make 3.90

-Losses of up to 1.10 btwn 103.90 and 105, max loss of 1.10 at 105 or higher, less than 1% of the underlying.


TRADE RATIONALE:  Crowded trades appear to be coming undone, and this one is certainly crowded, risking 1% to make 4% of the underlying given the stocks technical set up, the relative out-performance  and the cheapness of implied volatility, this trade lines up as a very decent risk reward.  I am choosing Dec expiration as the stock is down about 4% since making new all time highs last week, and I generally don’t love to initiate bearish potions on such weakness, but I am starting with a 50% position.  One last point, CL gets a disproportionate amount of the sales from overseas, this is the exact sort of set up that appears to be doing some damage on sales growth for large U.S. multi-nationals.