The U.S. Senate has passed a deal to provide more than $2 trillion to individuals, corporations and local governments in an attempt to blunt the impact the coronavirus is having on the U.S. economy. Now the bill will head to the House of Representative before making its way to the president.
This is good news for many stocks on Wall Street, including one we are holding in our portfolio: The Coca-Cola Company (NYSE:KO). And KO’s slight push higher gives us an excellent opportunity to sell a covered call against the stock.
What’s in the Package?
The Senate’s stimulus package contains $500 billion in funding for big businesses and municipalities, months of expanded unemployment insurance, and a one-time cash payment to Americans. It will also provide aid to state and local governments, as well as funds for medical equipment, hospitals and healthcare workers.
The cash payment is $1200 to adults making less than $75,000 annually and $500 per child to American families.
Unemployment insurance would increase by $600 a week for up to four months, and unemployment would be extended to freelance and furloughed workers.
With all of that money going to American citizens, we expect consumption to pick up, which should have a positive short-term effect on the economy. However, we think this will mostly benefit retail and technology stocks.
KO is still dealing with supply chain issues due to the outbreak, and unfortunately, more spending by consumers won’t solve that problem.
But a slower rise isn’t bad if we’re selling covered calls. It just means we’re less likely to have our stock called away from us.
Looking for a Strike
After giving up most of its opening-bell bounce on Tuesday, KO rallied with the rest of the market on Wednesday. It still has a long way to go to recover its losses from the past few weeks — just like every other stock in the S&P 500 — but it is creating more and more distance from the low of $36.27 it established on March 23.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
If you have been holding shares of KO, this is a great opportunity to sell a covered call against your shares. It’s typically more profitable to sell calls when the underlying stock is moving higher because the call premiums will be worth more.
When the underlying stock is moving higher, call option sellers will usually demand a higher premium as compensation for the increased risk they are taking by selling the calls, and call option buyers will usually be willing to pay a higher premium because they believe they have a higher likelihood of making a profit.
Even though we think the stock is going to face strong resistance at $44, we want to reduce our risk of having our shares called away from us at too low a price during this time of exceptional market volatility. We think $47.50, which has served as resistance in the past, would be an excellent strike price.
As an added bonus, the $47.50 strike has a lot of open interest and liquidity. This means it should be easy to get into this trade today and easy to exit if we need to in the future.
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.