It’s been a rough few days on Wall Street. Traders hate uncertainty, and the continued spread of COVID-19 has amped up the uncertainty levels around the world.
Nobody knows the full extent of the impact COVID-19 may have on the global economy, but traders are sure it’s going to have an impact on travel, oil consumption and goods produced in China. That’s why we’re seeing stocks in each of these areas getting hit hard.
But there are a number of consumer staples stocks that are proving to be quite defensive and resilient as traders rotate their money out of more aggressive stocks and into more conservative stocks.
The Coca-Cola Company (NYSE:KO) is one example. Sure, people may be less willing to travel these days for fear of being exposed to the virus, but they are no less willing to crack open an ice-cold Coke as they try carry on with their daily lives. This gives us a great opportunity to enter a new put write on KO.
Disruptions Have Hurt KO Less
While KO is resilient, it isn’t immune to the selling, and it isn’t protected from supply disruptions. The company said the virus outbreak would likely impact its first quarter earnings.
It filed its 10-K annual report with the Securities and Exchange commission this week, and in it, the company said the virus has created delays in the production of some of its ingredients.
KO dropped with the rest of the market, and these announcements didn’t help.
But compare KO’s performance with Macy’s, Inc. (NYSE:M), which reported earnings this week. During its earnings call, COVID-19 came up, and CEO Jeff Gennette noted that the company has seen a slowdown in the production of its goods in China.
In the chart below, you can see that M’s drop has been much steeper.
Daily Chart of The Coca-Cola Company (KO) and Macy’s, Inc. (M) — Chart Source: TradingView
M is a company that is already struggling, but it is also in a sector that will struggle more because of the virus. KO seems comparatively strong.
Both companies acknowledged issues with their supply, but M was much more affected by the news.
Banking on Support at $57
KO has dropped below $58, which served as resistance in late January and looked like it might become a new support level. However, because of the extreme volatility we are experiencing in the stock market this week, KO dropped just below $58.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
The $57 level served as a solid support level in late January, and we expect it will again if the stock does pull back a little further today.
Selling a put write with a strike set at $57 is a good way to take advantage of KO’s support. Because this is a volatile time, we don’t want to be obligated in this trade for more than a month. However, traders should still look for a strong premium.
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.