Options: Clorox and Consumer Clouds
Clorox's earnings are due anytime now ... and the options traders are betting they won't be good, according to one options analyst.
"It's earnings anxiety," Rebecca Darst said Thursday morning on "Squawk Box." When implied volatility is at twice the historic reading, what that tells you is that option traders feel that there's twice as much price risk over the next month than they've shown historically, and even though the earnings announcement is imminent, what we saw were options traders foregoing front-month exposure, and trading in June and July 55 calls, selling these for a premium, which, all other things being equal, was not an encouraging sign."
Calls are the right to buy a certain stock at a specific price in the future. The fact that traders are selling those rights means traders think the Clorox price will likely fall below that $55 level, allowing them to fulfill the call obligation at a lower cost and thereby make a profit.
There are signs of weakness in the consumer sector in general, Darst pointed out.
"The performance of the consumer products in recent weeks are not such an encouraging sign for the economy as a whole. I was reading some analyst comments on the way to the studio that the consumer staples index, which performed better than any other sector in Q1, was the only sector to show a decline in April, and the reason is these commodity input costs. They're all really struggling, and I think, perhaps, Procter and Gamble has done a better job of managing its cost exposures than Colgate Palmolive , but Clorox?
"The magic of Clorox may not be so magical today. They are heavily exposed to commodity, primarily petroleum, costs. It's petroleum that goes into the plastic bottles for their bleach; it's petroleum that makes plastic trash bags; they're exposed to soybean oil; they're exposed to corn oil for salad dressings, and so on. This company was struggling with its cost exposures last quarter, and its share price suffered, but what we saw in the options market yesterday, a 45 percent hike in implied volatility yesterday, intraday, that was more than any other company on our platform." ..