Long are the days of media-hyped battles over who’s a fan of The Coca-Cola Co (NYSE:KO) or PepsiCo, Inc. (NYSE:PEP). Now, KO is in a heated battle to simply justify the existence of its sugary drinks. The current perception is that sugary pops are not too dissimilar to smoking products.
Health issues aside, Coca-Cola has reputable management with just a few flubs in its long history. KO stock lacks pizzazz in this age where tech hogs most investors’ interests. Coca-Cola is, sorry to say, often under the radar of most traders.
This week, though, Coca-Cola reports fourth-quarter earnings. Maybe this will spur some life into an otherwise boring equity.
Technically speaking, KO usually lives up to the breakpoints on charts. In late 2016, Coca-Cola stock had some scary moments but managed to stabilize in choppy trading. However, it has set a roof around $42 per share.
If earnings are well-received, KO stock could rally into a reversion to the mean on the daily chart. I see higher lows knocking on the roof. This could indicate a tiring bear. Eventually, Coca-Cola bulls should prevail, and the stock should overshoot higher.
Furthermore, this upside target would coincide with the breakout from a 10-month-old lower-high trend. If all goes well, KO could retest $43 per share.
This is not a forecast — just a mere bet on a postitive reaction to earnings.
How to Trade KO Stock Before Earnings
Since earnings events add a short-term gambling aspect, I need to make sure the size of my trade won’t break my heart — or my piggy bank. So I won’t buy shares of Coca-Cola ahead of earnings. Instead, I’ll risk a fraction for the opportunity to gain a lot.
In 2016, only February’s earnings report was well-received by Wall Street. But of late, analyst expectations have been steadily adjusting downward, so they may have reset to a more realistic level.
The Bet: And an emphasis on “bet.” Buy KO Feb $42 calls for 29 cents per contract. Options markets are pricing in about an 90-cent move in either direction this week. If I guess the direction right, my calls would be in-the-money and profitable.
The Alternate: Instead of buying naked calls, I can buy a Feb $41.5/$42 debit call spread for 25 cents per contract. If KO rallies as expected, I have a chance to double my money.
When buying calls or debit call spreads, the cost of the trades is usually the maximum I could lose. The worst that could happen is for time to expire and my options expire worthless. So where I place my calls is important. Going too high with my calls would require KO stock to move a big amount, else I could still lose — even if I guess the right direction.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.