Investor Fear Creates Opportunity In CLX Stock
While investors are fretting, worried about the next “collapse” in stocks, I sold puts on Clorox stock at the $57.50 strike for more than 1% for one month! With so many investors tuned to the media and reading all the “end of the world” blogs, many are missing out on the advantage of higher volatility in providing excellent opportunities.
It’s important to remember that no bear market since 1900 ever crashed right out of the gate. Bear Markets plod along moving lower and lower and then suddenly they have a breath taking rally and then a really big plunge which has investors back fretting again.
Volatility jumps and then within a few days the market seems to stabilize. The bear then goes back to plodding along and repeats the process. All the while the market moves lower. Then there are those really dramatic falls which often marks the end of the bear and scares the pants off investors.
Since I believe we are in a bear market now, I am pretty sure that it won’t collapse right at the beginning. Therefore I want to build up more cash.
Clorox stock is a perfect example. What a great trade on not just a strong stock, but a great company as well.
The stock is below the 200 day moving average but just barely. However with today’s action (August 19 2011) the stock has fallen back to $63.56 which is moving the stock towards the lows of January 2011 wiping out most of the gains for the year. Because of the fear among investors they have pushed volatility up which makes the option values of Clorox Stock excellent.
Today I sold the Sep $57.50 put strike for 0.65 cents. Better than 1%, but what is more important is the strike.
Look at the above chart. The 2009 crash low for Clorox Stock was $45.67. The present dividend is $2.40. At $57.50 the dividend comes in at 4.17%.
But the important aspect of studying charts is looking at strikes. The $57.50 strike is marked in red. Clorox stock has not been that low since October 2009. What a perfect strike to be selling. Meanwhile if the stock falls to $57.50 by mid September there will be lots of opportunity for me to buy it back and roll down and further out. Looking at the above chart I would put the odds of Clorox Stock reaching $57.50 by mid-September at less than 10%.
But it is important to have a plan. My plan would be to buy back the Clorox Stock $57.50 put and roll out and down. Since I have a plan, making the decision to roll down and further out in time will be very easy to make. There is no emotion involved.
Today’s recent Clorox Stock trade shows a few important aspects of investing:
1. Study the past charts, particularly the lows in the closest bear market. These charts often give a clue as to what the level the stock could fall to in a panic.
2. Remember that collapses in bear markets don’t happen overnight. They build up. This gives me lots of opportunity to sell puts for higher premiums while waiting for the bear market to push my favorite stocks lower.
3. It is important to watch the big dividend blue chip stocks for opportunities. In a bear market I see no reason to watch the small cap or the speculative stocks. There is lots of opportunity in the big cap stocks. As well if the market crashes and I get assigned, I know that the big caps will eventually recover and all the while I get a decent dividend with lots of chances to sell covered calls until I am exercised from my shares.
4. Turn down the noise on the media outlets. Forget the doom sayers. Remember that it is when stocks are at firesale prices that the best returns will be made. Raise larger amount of cash than usual and don’t worry about that cash pile not earning much. All it takes is one great trade in a bear market to make up for months of not earning anything with the pile of cash.
5. And finally, it is important to have a plan. Be consistent and don’t question the plan if it has worked in the past. Rethinking the plan when the stock is at the prime moment for the trade means the opportunity could be lost and the trade will not work in the manner the investor had hoped. Having a plan reduces or even eliminates emotion.
Clorox Stock Trade Summary
Today’s trade in Clorox stock is just one of the many trades I have done lately. The giant jump in volatility is building my portfolio and increasing my cash flow which I will use in the event of a market crash. I believe it is important to take full advantage of this recent jump in volatility to sell out of the money puts at strikes that just a few weeks ago were trading for pennies. My recent trade in Clorox stock is an example of the opportunities many investors are missing.