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We accepted shares of Monster Beverage (NASDAQ:MNST) when our MNST September 21st $62 Put Write expired in the money. Since then, we’ve successfully sold one covered call on MNST. Now, we’d like to do it again.

MNST jumped up yesterday on positive news.  If we sell calls at this point, we can collect premium that can be rolled out again if the stock drops back to a more moderate level.

Overblown Dispute with Coca-Cola

Back in November, news of a dispute between the Coca-Cola Company (NYSE:KO) and MNST overshadowed MNST’s strong third-quarter earnings. KO acts as MNST’s distributor, and KO announced it was launching its own energy drink in 2019.

That news led to speculation about the health of the two companies’ partnership, and the companies are heading into arbitration to determine whether KO has violated their agreement with MNST.

The stock jumped yesterday after Suntrust analysts upgraded MNST from “hold” to “buy.” They believe, as we do, that concerns about the KO deal have led to the stock being oversold.

Our argument is that it makes much more sense for KO to see MNST as an acquisition target this year than it does to compete with energy drinks of their own. A merger like that has accretive value and it avoids the legal liability that KO is flirting with right now.

However, to be clear we don’t expect an acquisition to occur in the short-term, and yesterday’s rally may be partially due to a short squeeze.

Gapping Up

If we look at the chart below, we see that MNST struggled in December. We think the probability for a recession or continued bear market in the 1st or 2nd quarter this year is very low. However, we don’t think the market will continue higher without one or two more interruptions this month. There is too much uncertainty.

MNST may be up after the upgrade from analysts, but back in November, analysts were sure the dispute between KO and MNST would cause trouble for the stock. MNST rose steadily into early December before selling off along with the rest of the market.

Daily Chart of  Monster Beverage (MNST) — Chart Source: TradingView

We think continuing to collect premium against our long MNST position now that it has gapped up is a good strategy. We rarely get called out of our covered call positions, and we expect this will allow us to roll the calls out (or just buy them back later) for more income.

To find out which MNST calls we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today. 

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.

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