Colgate-Palmolive (CL) Represents a Sensible Choice for Unusual Options Activity

Despite the complexities of participating in the equities sector this year, one factor continues to hold steady throughout the post-pandemic new normal: substantial interest for speculative trades. Therefore, when the lights went out on the Friday, Sept. 9 session, it was a bit of a surprise to see household goods company Colgate-Palmolive (CL) command significant bullish attention. While CL stock may not be the most exciting opportunity, it might be one of the smartest.

Arguably, the main long-term catalyst for Colgate-Palmolive is the Federal Reserve, specifically its pivot from a dovish monetary policy to a decidedly hawkish one. Several days ago, Fed chair Jerome Powell presented his speech at the annual economic symposium at Jackson Hole, Wyoming. Powell warned that in order to control multidecade highs in inflation, strong action (i.e. raising interest rates) was necessary.

However, he also acknowledged that such aggressive measures would cause “some pain” to households and businesses. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” stated Powell.

Nevertheless, the decision to raise rates won’t exactly be popular with everyone. Over the past several decades, the Fed generally implemented dovish monetary policies. In turn, this contributed to a reduction in spending or purchasing power. However, this dynamic also meant lower borrowing costs, incentivizing risk-on ventures.

Now, the opposite monetary trajectory will likely occur. Instead of incentivizing risk, the market will organically promote value and stability. That should help investments like CL stock. Indeed, astute traders picked up on the longer-term implications, resulting in Colgate-Palmolive being the subject of unusual options activity.

CL Stock Represents a Pivot to Smart Wagers

Interestingly, when the Sept. 9 session closed, the most unusual of unusual options activity pointed to Bausch Health Companies (BHC). As you may know, Bausch recently suffered a legal defeat regarding a drug patent case, which it is appealing. Still, the pain was done to BHC stock, suffering a year-to-date loss of over 73%.

It’s worth mentioning this as the derivatives market continues to attract speculative wagers. However, CL stock ranked number two in terms of unusualness, suggesting that a pivot may be occurring toward investments that are better suited for the coming fundamental circumstances.

Traders dove into the $80 calls for CL stock with an expiration date of Oct. 21, 2022. Volume reached 17,248 contracts against an open interest reading of 196. With Colgate closing at $78.03, shares only need to rise about 2.5% for the position to be in the money. Therefore, it’s a very reasonable wager.

Still, one factor to consider is the bid-ask spread, which was 10.14% as represented by the midpoint price ($1.48). Typically, a wider spread indicates lower levels of liquidity. In addition, market makers often give themselves a larger safety margin for transactions that are difficult to facilitate.

That said, the bullishness toward CL stock aligns with current trends. According to data from Barchart.com, Colgate features a put/call open interest ratio of 0.60. Typically, 0.70 represents the delineation point between bullishness and bearishness, with figures below 0.70 indicating that more traders are acquiring call options than puts.

Fundamentals Favor Colgate-Palmolive

Should investors follow the broader implications of the Fed’s hawkish monetary strategy, CL stock increasingly looks attractive. It all comes down to logical economic incentives.

During inflationary cycles, the dollar gradually loses value over time. Therefore, all other things being equal, it’s better to spend a buck today than it is to wait until tomorrow. One of the reasons inflation was so intense earlier this year was because during the first half, purchasing power eroded by 5.34%.

Now, the Fed wants to implement a hawkish monetary policy or to tighten the money supply. In such a scenario, the opposite dynamic to the above scenario materializes. It’s better to save a buck today because it will be worth more tomorrow. Therefore, risk-on investments usually don’t perform well during such deflationary cycles. By simply not spending, consumers enjoy a positive return on their cash.

However, a retail manufacturer like Colgate-Palmolive can benefit because its products represent necessities. In other words, whether the dollar rises or falls in value over time, consumers still need to brush their teeth. This relevance will likely help drive the company forward, which is why the call options on CL stock present a very smart, forward-thinking profile.

Follow the Money

To summarize the above assessment, the bullishness toward CL stock simply involves following the money. During an inflationary period, it might make more sense for investors to consider riskier ventures due to the cheap money flow. However, in a deflationary cycle, the dollar itself rises in relative value, meaning that it’s better to invest in companies that produce indelible products or services.

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