Shares of consumer goods company Colgate-Palmolive Company (CL) lost 7 percent over the past year, declining about half as much as the S&P 500. One trader sees a further decline in the months ahead.
That’s based on the May $62.50 puts. With 122 days until expiration, 8,317 contracts traded compared to a prior open interest of 257, for a 32-fold rise in volume on the trade. The buyer of the puts paid $0.33 to make the bearish bet.
Shares recently traded close to $77, so they’d need to lose more than $15, or nearly 18 percent, for the option to move in-the-money. Plus, shares would need to drop under their prior 52-week low of $67.84.
A quick drop in shares could cause the put options to deliver big percentage gains quickly, however.
Colgate-Palmolive trades at a bit of a premium of 35 times earnings. Revenues rose a scant 1 percent in the past year, and earnings dropped by 3 percent.
Action to take: With a high valuation and big move higher in recent months, shares could potentially pull back from here. Investors who are patient can do far better than the company’s 2.44 percent dividend yield at current prices.
For traders, the put options are cheap and likely to expire worthless. But on a selloff in shares, they could still deliver high-double-digit returns or better. That makes for an inexpensive hedge on an overpriced stock now.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.