Clorox (NYSE:CLX) just scored an upgrade from JPMorgan (NYSE:JPM) to “overweight” due to the sharp rise in demand for the company’s disinfecting products. We’ll look at the details below, analyze the impact on Clorox stock, and end with a trade idea to bank on additional gains.
In their investor note, JPMorgan said Clorox was “one of the few stocks in our coverage that can positively surprise guidance, as the bar was already low before COVID-19 (CLX lowered guidance on 10/19).” The firm expects CLX to grow 3.8% in Fiscal Year 2020 with adjusted earnings per share of $6.33.
Hysteria and hoarding surrounding the coronavirus crisis have caused a nationwide shortage of disinfectant products like wipes and cleaners. As one of the leaders in the space, Clorox is well-positioned to profit from the newfound demand.
Its share price was already holding steady in the face of the market meltdown, but yesterday buyers turned the dial up to ten. The stampede jammed Clorox stock up $27, or 15% to a record high above $200.
Clorox Stock Charts
The price chart of CLX has been bullish for years, so gains are nothing new. It’s the acceleration that is so out of the ordinary. The weekly view reveals a decade of slow and steady appreciation, accompanied by consistent increases in dividends. This month’s surge was preceded by a year-long trading range that had the stock locked between $144 and $167.
Long-term bases, when broken, often result in robust rallies. This is exactly what we’re seeing in CLX right now.
The daily chart shows a sharp uptick in volatility over the past month. Fortunately, many of the daily candles are overlapping. So while crazy, the stock has really just been chopping in place. Until this week, that is.
With the surge, CLX has officially departed its range. Since Clorox stock is already up over 12% this week through Thursday, you have two choices. Ignore the overbought posture and enter bullish trades to profit from continued follow through. Or, wait for a retreat toward $190 or $185 before piling in.
The former path risk is that you have to sit through a retracement before seeing profits. And the latter risks that we never pull back and you miss out.
In either case, bull call spreads provide a limited-risk and low-cost way to play. Right now, bid-ask spreads are very wide, so limit orders are a must. Plus, you may need to massage the order a bit to get filled.
The Trade: Buy the July $200/$210 bull call spread for around $4.
The max loss is limited to your initial trade cost and will be forfeited at expiration if CLX sits below $200. The max gain is limited to the spread width minus the cost (or, $6 in this case). You’ll capture it if Clorox sits above $210 at expiration.
Using July options gives the stock four months to move toward $210. If you’re looking for a quicker payout, you could use April options. Just be aware your loss will arrive quickly as well.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!