Things have been a little slow in the market this week. The S&P 500 is encountering resistance at around 3,200. For us, that just means it’s the perfect time to sell a new covered call on The Coca-Cola Company (NYSE:KO).
Few important economic and earnings reports have come out this week, which is one reason it has been so quiet. For example, although Tuesday’s headlines in the Wall Street Journal and Bloomberg referred to good housing and manufacturing data in the U.S., both the cited reports lag earlier data.
While the reports this week confirm bullish sentiment from other reports, the results aren’t all that surprising to investors.
The biggest news yesterday was the impeachment vote, but the market doesn’t seem to be concerned with that.
Similarly, the flow of earnings data prior to the season really kicking off in January is light, with few surprises expected. For instance, an early report from UniLever (NYSE:UL) hit the stock’s value this week, but the data that showed economic slowing in Europe isn’t really new information.
Market conditions like this can sometimes be frustrating for investors relying on momentum and trends, but for income trading, this doesn’t present any major challenges.
In many ways, this is a great time to be selling call and put options. Before earnings are released, premiums are high, and volatility is low.
Why Sell Calls on KO?
We still expect optimism around the details of the U.S.-China trade deal to keep the market from falling before the end of the year. We’ll use that bullishness to maximize our income while carefully considering any new positions as opportunities arise.
We originally bought KO common stock at $55 per share when our KO October 4th $55 Put Write expired in the money, and in the time we’ve owned KO, we have successfully sold three covered calls against the stock.
We still feel that investors will continue to demand income payers and consumer-staples stocks like KO in 2020. Even so, we want to be a little more aggressive with the covered calls we sell against this long position.
Our strategy is to sell calls with an expiration date that is close to KO’s scheduled earnings release date in February. This allows us to collect extra income because the calls are slightly inflated in value, but it is a risk because KO could jump above our strike price. If that happens, we would get called out of the stock.
We can limit our risk and ensure we collect a profit by selling a covered call with a strike price equal to the price we purchased the stock at. If KO is called away at $55 per share, we will break even on our common stock position, and we would get to keep all the premium we collected when we opened this position.
$55 is a Key Level for KO
From a technical perspective, we think selling calls in front of earnings makes sense because there is some strong resistance in the $55 per share range — as you can see in the chart below.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
KO has teased us with attempts to break through, but it still hasn’t managed to get above that resistance level.
If traders push the stock back towards support over the next few weeks, we will have maximized our hedge and can consider modifying our strategy. We may get another chance to sell a covered call before KO reports earnings, which would let us collect even more income on the stock.
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.