This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

CL: Brushing Up on a Defensive Play

Jill and Scott review the fundamentals and technicals in the consumer staples space and call out a trade in Colgate-Palmolive (CL - Get Report) in the video below.

Here is a smartly structured options trade for a trader who is looking to for strength in a declining market.

This year CL has outperformed the S&P 500. It's had its ups and downs just like the rest, but it's strong. If the market continues lower, CL might not rise sharply -- in fact, it probably won't. But it is likely to "hang in there" and either enjoy modest gains, stay stable, or at least not suffer as badly as the broad market.

But right now CL's options are priced with a classic built-in fear premium that often accompanies falling markets running amok with fear mongers. This fear premium can be observed by studying CL options' implied volatility.

Right now, CL's implied volatility is high. The 30-day implied volatility is sitting up around 20%, which is in the top third of the six-month range. Further, the implied volatility is decidedly above the 30-day historical volatility, which is around 14%. What's all this mean? CL options are expensive.

The objectives of this trade set up will be two fold:

Volatility objective: To structure a trade that benefits from over-priced options (or at least doesn't suffer from because of it)

Directional objective(s): To profit if CL shares rise (though there is no expectation for a big rise, and thus it is acceptable to forgo profits if an upside breakout should occur), if they remain steady, or even if they slightly decline in value.

Given this thesis, a logical trade set up would be to sell an out-of-the-money put credit spread.

The next step in this trade set up is going to the option chain to see A) whether such a trade can be structured well given current available strikes and put prices, and B) which specific strikes and months make the most sense.

In this case, the best choice is to sell the CL August 80/82.5 put spread at $0.40 by executing the following legs:

Trades: Sell to open CL August 82.5 puts at $0.74 and buy to open CL August 80 puts for $0.34 for a net credit of $0.40.

Why this particular spread? The 80/82.5 spread is the lowest strikes to sell while still getting some "meat" for options premium. The short strike is the price point the underlying must remain above to deliver the maximum profit. The lower the short strike, the better because it provides more room for being wrong. But the 77.5/80 spread is only $0.09 bid. There's not enough premium there to make the trade worthwhile.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
CL $69.34 0.00%
AAPL $124.43 0.00%
FB $82.22 0.00%
GOOG $548.00 0.00%
TSLA $188.77 0.00%


DOW 17,776.12 -200.19 -1.11%
S&P 500 2,067.89 -18.35 -0.88%
NASDAQ 4,900.8850 -46.5560 -0.94%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters