Guarding the drop in Clorox

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Clorox has been fighting a downtrend, and investors remain nervous toward the stock.

optionMONSTER's Depth Charge monitoring system detected the purchase of 1,000 August 85 puts for $2.10 and the sale of 2,000 August 82.50 puts yesterday. Volume was more than 5 times open interest at both strikes.

The position will earn a maximum profit of $2.50 if CLX closes at $82.50 on expiration. It cost nothing to open because they earned extra income by selling more downside contracts. That leverages a move to a specific level, while obligating them to buy shares below it.

He or she probably owns the stock and is using the trade as a hedge. It has the double benefit of protecting against a decline of $2.50 while also programming a buy order at the lower price. Given that the consumer-products name bounced around $82.50 last week, they're probably willing to buy more if it gets that cheap.

The strategy is known as a ratio spread because 2 times more puts were sold as the number purchased.

CLX rose 0.97 percent to $85.13 yesterday but has been trending lower since touching an all-time high of $90.10 in April. It's now back near the top of that descending channel and is sitting at its 50-day moving average, which could make some chart watchers fear another push to the downside. The ratio spread is a common way to protect against such a move. (See our Education section for other hedging strategies.)

Overall option volume was more than quadruple the daily average in the name. Puts accounted for a bearish 83 percent of the total, according to the Depth Charge.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Options

Referenced Stocks: CLX

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