This Clorox Stock Options Trade Cleaned Up, Delivering Big Profits

As predicted, Clorox's (CLX) stock moved lower last week following its earnings rally. This providees a great example of how options traders can profit when stocks overreact to earnings news.
By Michael Thomsett ,

Clorox's (CLX) - Get Report stock price gapped higher last Monday in the wake of a strong earnings report. On Tuesday we correctly predicted that the stock would correct lower as the week went on, and recommended that investors purchase the November 125 put option with an ask price of 1.55. (The cost of the trade including fees would be $164.)

Technical analysis showed that the stock had formed a spinning top pattern, with a potential reversal confirmed by a double volume spike and overbought momentum.

As the current chart below reveals, the price retreated as expected and the option was profitable.

In fact, Friday's close moved the stock price down from Monday's price of $125.70 to a close of $122.28. At the same time, the November 125 put was bid at 3.10, or net of $301 after trading costs. This means there was a profit of 83.5% based on the put's net purchase price.

This price behavior often is seen right after earnings surprises. The stock's price moves to an exaggerated level and then retreats back into range within a few days. This is where the opportunities lie for short-term option trades. They don't work 100% of the time, but they works often enough to be worth a careful look. Using chart reversal patterns and strong confirmation is a better way to trade options than relying on changes in implied volatility.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Besides blogging at TheStreet.com, Michael Thomsett also blogs at theCBOE Options Huband several other sites. He is author of 11 options books and has been trading options for 35 years.  Thomsett Publishing Website

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