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Go Long Clorox (CLX) And Sell A Covered Call

|Includes: The Clorox Company (CLX)

12/09/2013 Covered Call Pick: Clorox Co (NYSE:CLX)

For our last article on Clorox go here.

Clorox Co. is a U.S. based manufacturer of consumer staple products such as cleaning products, trash bags, food items. and water filtration systems. Founded in 1913, this Oakland, California based company is best known for their iconic consumer brands such as Brita, Formula 409, Glad, and their namesake bleach brand: Clorox.

Clorox has a market capitalization of $12.37 billion, with 129 million outstanding shares.

Clorox currently pays a $0.71 dividend for a current yield of 3.0%.

With a beta of 0.74, CLX currently trades with approximately 25% less volatility than the current market.

There, isn't much to discuss about this pick, as we've done CLX multiple times in the past. If you are interested in the story, we recommend reading on our past articles about the stock, as the story hasn't changed. Consumer staples like CLX continue to perform over time. While they have not had runs this year like some of the more volatile names in the markets, they have a level of safety that adds a new dimension to the investment that is more important than sheer returns.

We're re-recommending CLX now due to the technicals. The stock just recently broke out of its buy range to the upside, a bullish signal for the stock. The stock's price is only 6% away from its pivot range, so we don't think it has run too far to get in now. This also shows a new leg for the stock after a 7-month period of consolidation, and follows a "golden cross" consisting of the 50-day moving average crossing above the 200-day moving average. All of these signals are quite bullish, and give us new reasons to institute/add to positions in the stock.

For a Covered Call Strategy on CLX, we're going to look for an out-of-the-money Call due to the number of bullish signals we have on the stock. Now you could go very far out of the money to get more upside potential on the stock, but then your premium would suffer. One of the reasons we write Covered Calls on our stocks is to help supplement income. That is why we are recommending buying CLX and selling the July 2014 $100 Call.

Scenario:
 

  • Buy 100 shares of CLX @ $96.29 = $9,629 + Commission ($12.95) = $9,641.95
  • Write 1 CLX July 2014 $100 Call @ $2.25 - Commission ($8.70) = $216.30

Note: Prices may vary from the time of post. Actual commissions paid will vary returns.


Static Return (Not Called):
(Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration

(2.16 + (2*0.71))/96.42 X (365)/222

= 6.10% Static Return


If-Called Return:
(Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration

(2.16 + (2*0.71) + 100 - 96.42)/96.42 X (365)/222

= 12.21% If-Called Return


Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.

Posted by OaktreeAdvisors at 12/9/2013 10:48 AM
Categories: Weekly Picks

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Disclosure: I am long CLX.

Additional disclosure: As active managers we will increase or decrease our positions as markets dictate.