The Coca-Cola Company (NYSE:KO) has been bouncing back and forth in a fairly wide consolidation range since early April. While the stock has established an encouraging up-trending support level — which started at $42 and has now drifted up to $44 — it has been unable to break above horizontal resistance at $50.
With the rally set to “take a break” this morning, we think it is a good time to sell a covered call against KO. If you’ve been holding shares of this stock, waiting for a chance to generate extra income, now is the time.
KO Needs Time to Recover
A covered call is a trade that relies on the underlying stock staying below a certain price, so some people may consider it bearish. Long term, however, we are bullish on KO. We wouldn’t be holding shares of it otherwise. We just want to generate extra income in the short term.
There are lots of reasons to like KO. Warren Buffet has recommended the stock before, and with 58 years of consecutive dividend increases, it’s easy to see why. But KO’s CEO has noted in the past that the impact of the COVID-19 lockdowns is only just beginning.
KO has seen strong sales of Coke products inside the home, but the company is still struggling to boost its sales outside the home. Many had hoped we would see the return of sporting events, concerts and other large gatherings this summer, but that hasn’t happened.
The sporting events that are happening are proceeding without fans, concerts have been pushed off until 2021 at the earliest and — outside of protests — most people are still avoiding large gatherings because states are starting to see an uptick in new COVID-19 cases.
We expect this lack of outside-the-home sales to be a drag on KO’s earnings for the rest of the year.
This means KO’s stock price is likely to remain stable within its current consolidation range, and it likely won’t have enough momentum to break through resistance anytime soon.
Twice Rejected at $50
The stock established its resistance level at $50 when it gapped lower on March 12 as the market was collapsing in the wake of the COVID-19 pandemic, and it has been unable to break above it for three months. We expect this level to continue to hold as resistance for a while.
In the chart below, you can see that it was rejected at $50 for a second time before last week’s collapse.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
KO’s $50 resistance level means $50 would make an excellent strike price. When selecting an expiration date, keep in mind that KO reports earnings on July 21. While you can earn extra premium by setting your expiration date after KO reports earnings, you would be taking on much more risk.
We’d recommend looking at dates before KO report.
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.