If you’re holding shares of Coca-Cola Company (NYSE:KO) like us, now is the perfect time to collect extra income using a covered call.
In March, we wrote that investors are unlikely to wait for a recovery before starting to bid prices higher. During the declines, we restated that forecast several times with our estimate that a bullish trend could start in mid-summer.
For now, it looks like we were right about our projection, but we may have been a bit too conservative about the timing.
Traders continue to move into tech and income stocks on speculation that a “reopening” of the economy will bear fruit in the short term. While we still believe this is a little premature, there is no reason for us to avoid taking advantage of the market’s bullishness a little.
KO’s Dividend is Still Steady
Companies across the market have suspended their dividends. With interest rates at near zero, and volatility rocking the market back and forth, KO is one of the few companies that still provide a decent return in the form of a dividend.
Thought the company withdrew its 2020 outlook because of declining sales, it has seen increased sales of orange juice, strangely enough.
But the real story for KO is the gradual reopening of restaurants and public spaces. On its earnings call a week ago, the company noted stadium and restaurant closures contributed to the fall of its global volumes.
KO will eventually recover, which is why its status as a consumer staple stock is well deserved. While we hold our shares and wait for a recovery, a covered call is an excellent way to generate additional income.
Hunting for the Right Strike
We want to give KO room to move higher because it will lower our risk of having our shares called away at expiration. But we don’t want to set too high a strike price on our covered calls because it will reduce our income.
On the chart below, you can see that the stock formed short-term resistance at around $49. While we expect KO to continue rising eventually, that resistance level would make a good strike price for a short-term trade.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
To make sure you collect a decent return on this position, you may have to look at expirations in June. If you do sell options with a later expiration, don’t forget that you can always take your profits off the table early.
We often recommend buying back trades for a profit to lock in gains and reduce risk, and it can be a great way to take advantage of the increased premium of a later strike price without worrying too much about the increased risk.
If the market cools off a little towards the end of May, traders may be able to roll these calls out for even more income.
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.