Earlier this week, we locked in our profits on a covered call trade on The Coca-Cola Company (NYSE:KO). We’ve been holding KO common stock since our KO October 4th $55 Put Write expired in the money, and since then, we’ve successfully sold two covered calls on KO.
This is the perfect time for a third.
Investors Push Toward More Aggressive Sectors
KO was plunging lower earlier this week, so we closed our last short call without opening a new one. Typically, when a stock is falling fast, the premiums for calls on that stock drop too, which makes them less attractive for covered call sellers.
Investors are starting to feel more optimistic about the stock market, and they are leaving consumer staples stocks like KO behind. If you look at the chart below, you can see that the Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) has fallen slightly since October.
Meanwhile, more aggressive sectors like industrials, technology and financials — represented by the Industrial Select Sector SPDR Fund (NYSEARCA:XLI), the Technology Select Sector SPDR Fund (NYSEARCA:XLK) and the Financial Select Sector SPDR Fund (NYSEARCA:XLF) — have all risen.
Daily Chart of XLP, XLI, XLK and XLF — Chart Source: TradingView
Historically, when traders are optimistic about the future of the stock market, they push their money into stocks from more aggressive sectors. That leaves safer stocks like KO behind.
Since the beginning of 2019, XLP has gained over 20%, so this recent slowdown in growth isn’t indicative of poor long-term performance. Instead, we think it represents investors’ shifting priorities. Consumer staples stocks will likely move sideways through the end of the year, and we think KO will follow in the short term.
Why sell a covered call then if KO has fallen?
Because the stock has just bounced off support at $52.
Bouncing to Resistance
When we said KO had been “plunging lower,” we left out that it had found support just above the $52 level. You can see its down-trending support forming in the chart below.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
As KO climbs back toward down-trending resistance, the value of call premiums will go up, and we can sell another covered call for extra income. Then, when KO hits resistance and starts to drop, we can buy back the call and lock in our profits.
We think the bullishness on the market, which is pushing people out of defensive stocks like KO, will continue through the end of the year. However, just in case something causes KO to rally, we are setting our strike price at $55.
We originally purchased KO at $55 a share, so if KO rallied and we got called out of our covered call at the $55 strike, we wouldn’t lose any money. In fact, because we collected income from the covered call, we would have made a small profit.
When picking an expiration, look for options with plenty of open interest and a tight bid/ask spread. You also want to go far enough into the future that you can still collect a decent premium, but not so far that you risk an unforeseen rally in the underlying stock.
To find out which KO covered calls we’re selling—and to get access to our full portfolio of income-generating trades—sign up for a risk-free trial of 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.