Clorox Option Trader Makes $3.7M Bet On 12% Downside

Shares of Clorox Co CLX are down 7.5% in the past week after outperforming the broad market throughout most of the year due to the pandemic.

Weakness in Clorox shares may be coming due to data indicating a potential slowdown in COVID-19 infections, as well as optimism about a potential vaccine being just around the corner.

The Trades: This week, Benzinga Pro subscribers have received two option alerts related to an unusually large Clorox option trades:

• On Monday at 12:05 p.m. ET, a trader sold 448 Clorox call options with a $230 strike price expiring on Sept. 4. The contracts were sold near the bid price at $1.701 and represented a $76,204 bearish bet.
• On Tuesday at 12:41 p.m. ET, a trader bought 5,000 Clorox put options with a $200 strike price expiring on Jan. 15, 2021. The contracts were purchased at the ask price of $7.401 and represented a $3.7 million bearish bet.

Why It's Important: Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large size of the largest Clorox option trade, there’s certainly a possibility it could be a hedge on a large short position in Clorox stock.

Pandemic’s Days Numbered? It’s hard to imagine a company that was better-positioned to thrive during the COVID-19 outbreak than Clorox. Unprecedented demand for Clorox’s cleaning products drove 22% revenue growth and 29% net profit growth for Clorox in the second quarter, and the stock was up more than 50% heading into that earnings report.

According to data from Johns Hopkins University, the number of daily new U.S. coronavirus cases has fallen from 70,000 in late July to around 42,600. A the same time, President Donald Trump said this week he's considering fast-tracking a coronavirus vaccine being developed by AstraZeneca plc AZN, potentially making it available prior to the November election.

The news on the COVID-19 front has sent the S&P 500 to new all-time highs, but Clorox shares are down as investors take profits on what could be a waning once-in-a-lifetime demand boost for the company.

The $3.7 million put purchase has a break-even price of $192.60, suggesting 12.2% additional downside for the stock over the next four-plus months. That downside may seem extreme given Clorox’s big second-quarter numbers, but prior to the pandemic, Clorox was trading in the $150 to $170 range.

Benzinga’s Take: For investors looking for economic rebound stocks, Clorox would appear to be the exact opposite. The stock may not revisit its early August peak at around $240 for quite some time unless the COVID-19 recovery deteriorates significantly at some point in the coming months.

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Photo credit: Mike Mozart, Flickr