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P&G Options Signal Volatile Times Ahead

Although options trading for most of the commercial products group remained calm Friday, Interactive Brokers Senior Market Analyst Andrew Wilkinson says he noticed a burst of activity for Procter & Gamble options, placing it among one of the most heavily traded by volume.

Procter and Gamble
Procter and Gamble

Much of the activity is present in the April contract, according to Wilkinson.

"At the April 45 strike price, a straddle was established with the purchase of 2,000 calls for $2.65 apiece, and with the purchase of 2,000 puts at a cost of $1.95 each," Wilkinson says, in a research note. "The position suggests this investor is looking for a surge lower or a rebound in the fortunes of the company, but would benefit the most from an acceleration of implied options volatility."

Based on where P&G shares are trading right now and the premium paid for the options, the investor would see breakeven points at $49.60 if P&G shares move higher and $40.40 if they move lower.

Implied volatility, which is a projected value for future volatility traders use in pricing options, has stepped up gradually for the consumer products giant since the beginning of February, and has remained about 3 percent above historical volatility readings for the stock, Wilkinson says.


"The trend is apparent today with the current volatility at 36 percent, about 3 percent higher than historical volatility of 33 percent," he adds.

The move comes at a time when the Standard & Poor's consumer staples index, which includes P&G, is still outperforming the broader S&P 500 Index, but by a narrower margin than it did a year ago.

What's been interesting in the sector is that large investors have been buying stocks of more cyclical consumer names such as cometics makers Estee Lauder and Avon Products instead of the more standard defensive names such as P&G and Colgate-Palmolive .

In an interview with CNBC, Wilkinson said he thinks P&G options investors expect that one of two scenarios will occur over the near term: Either conditions for P&G will deteriorate or investors will begin to realize that they have "thrown the baby out with the bathwater" in the case of the company.

Consumer staples investors are closely watching pressures on the group, such as consumers who have been trading down to private-label brands in order to save money. This trend, if it continues or accelerates, could have an impact on performance at P&G, which makes brands such as Tide detergent, Olay moisturizers and Pampers diapers.

However, some saw signs of improvement in the retail sales reports released Thursday, which showed several retailers outpacing analyst estimates and Wal-Mart Stores releasing a monthly sales gain that was more than twice the rate analysts were predicting.

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