It is obvious to me that the smart money is pushing up defensive stocks. Let's take a quick glance at Clorox. On Friday it closed at $69.95 down .62 cents or not quite 1% for the day. Clorox stock is trading at 17.66 times earnings. The dividend is nice at 3.4% and this is part of the reason the stock is being pushed by smart money. They believe the dividend alone will entice retail investors, which it seems to be doing. The 52 week low was $60.56 and the high was $72.43. So at $70.00 does the stock seem cheap or under valued? I don't believe so.

Let's look at this chart for the past 5 years. Look at how often the stock has reached $67.50 and then look at the mean average of $60.00. Looking below the $60.00 line we can see how often the stock has moved below 60 and then worked it's way back up to $67.50. It wasn't until Carl Icahn's announcement earlier this year that the stock moved beyond its normal range.

During the past year I have written about Clorox and how earnings didn't quite meet expectations, how they over paid for Burt's Bees and their most recent announcement that earnings would not meet expectations (May 2) due to higher commodity prices that would impact their earnings. The stock sold off down to around $67.50 and then moved back up to just above $70.00. What did this? There are probably two principal culprits. Clorox does not have a large volume of daily stock trading making it easier for smart money to push this stock higher. Also there is the belief among many investors that the Carl Ichan news will mean higher prices are in store for Clorox. Therefore any weakness and retail investors buy more.

But I believe until I see firm support and a new range from $67.50 to possibly $72.50, this move higher is suspect and in over valued territory.

1. I realize that to date I have made $16,794.00 in income through selling naked puts. This will go a long way to reducing my average stock price should the stock pull back and I get assigned shares. However it also means that when an opportunity presents itself for a short term trade I can use this additional capital to try to augment the income for the year on Clorox.

2. I am holding 5 contracts June $65 puts that I sold for .70 cents. This means I have some puts into the next month that if they expire will afford me another opportunity to keep selling naked puts.

3. I can let a few other stocks in my portfolio bring in additional income and reduce my goal for the year on Clorox to 8% or 10%. Remembering my strategy of how I aim for 12% on my entire portfolio, I can not be as concerned that Clorox is not performing as well as long as the entire portfolio is working its way toward a 12% annual return. Right now I have earned 8.21%. With 7 months left to go I just need to earn .54% per month for my entire portfolio to reach my annual overall goal of 12% on my US stock portfolio.

4. I can consider selling puts further out in time to bring in larger premiums and stay away from the $70.00 strike until it is proven.

5. I still have a lot of cash available in my overall portfolio that should weakness appear in the stock I can consider adding more capital for a short period, again to augment my overall earnings.

6. Should the stock sell off back to the $67.50 strike, I will sell puts at that strike rather than lower such as I did on May 3 when Clorox came back to $67.47. Instead of selling the June $67.50, I sold the June 65.00. This time around, unless there is a significant reason not to, I will not sell puts lower than $67.50.

Therefore looking at the above points, it's much easier to alter my naked puts strategy while waiting for a sell off or move lower in Clorox or a firm confirmation of a new higher trading range. The strategy for now will be to sell further out in time and keep an eye out for weakness in the stock which will afford opportunity to sell puts for better premiums.

The advantage of setting up this strategy is that by going out further in time, it affords me, more time to consider rolling these puts earlier, if the stock should sell off and place my naked puts in the money. My past experience with selling naked puts far out in time is that by staying on top of them and rolling early, I greatly reduce my chance of being assigned shares before option expiry.

With this strategy in mind, I sold today, 5 put contracts OCT $67.50 at $2.19. It was an obvious choice and here is why. Looking at my Clorox stock chart above, I can select $67.50, the top end of the range I have marked, as the place to sell my strike. Even though it is at the top end of the range, it also means that over the past 5 years the stock has reached that top end range numerous times and should the stock fall below $67.50, I have confidence it will eventually recover to that level. As well, should the stock fall below $67.50, I will roll early and I can consider reducing the number of put contracts when I roll forward. 

Which month to consider is a pretty easy choice. The chart below shows the strikes for October. At $2.19 this puts my break even on these $67.50 puts at $65.31 - about mid range between $60 and $67.50. This also equals 3.2% or 0.64% per month for the next 5 months.

Here are the put premiums for July and also January. July at .75 cents offered 1.11% for 2 months or 0.55 percent per month.

January 2012 naked puts offered 4.4 or 0.55 percent. The obvious best choice is October. Sometimes finding the right strike is simple.

NAKED PUT SUMMARY:

With my strategy now in place, once the capital is released from my June options, I can sell additional puts with that capital. In this way I hope to come close to my goal of 12% again this year. At the same time, I know that my overall goal of 12% for the entire portfolio is on track and can be reached even if Clorox does not reach its own personal goal. Presently I am trying to buy back my June put options for .05 cents, but so far there are no takers.

Click here to view the Clorox 2011 trade history.

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