We reached an important milestone yesterday. The S&P 500 successfully filled the bearish gap the index formed on Feb. 24 when the market started its latest bearish run. This is great news for the stock market and for traders looking to take advantage of ongoing bullish momentum.
Interestingly, not all stocks in the S&P 500 have been moving higher. The Coca-Cola Company (NYSE:KO) is a great example of this. While the stock hasn’t helped boost the index by moving higher, it also hasn’t hurt the index by moving lower. Instead, it has been consolidating sideways.
This makes KO a great candidate for a covered call trade, and if you, like us, have been holding shares of KO, this is a great time to put them to work.
Earning While We Wait
We’ve been holding shares of KO because we believe the stock has a lot going for it. It offers decent, steady dividends, which are appealing now that interest rates are low, and its product is still popular despite the COVID-19 pandemic.
But interest rates were rising slightly earlier this week, and KO suffered as a result. We don’t think that trend will last, but it won’t be good for the stock in the short term.
When it reported earnings two weeks ago, it reported its largest quarterly decline in revenue in 30 years. Though CEO James Quincey said the company believes the second quarter will be the most challenging, meaning the worst is behind KO, investors weren’t enthusiastic enough to push the stock above its resistance at $50.
The company may have a good third quarter. It’s launching new products like Topo Chico Hard Seltzer, and Coca-Cola Coffee will launch in the U.S. in 2021.
But investors are still cautious, and we don’t see them pushing KO higher without big news.
About That $50 Resistance Level…
KO has been bouncing back and forth between horizontal resistance at $50 and up-trending support at around $44 for the past few months, and we don’t anticipate this changing anytime soon.
In the chart below, you can see that after it reported earnings on July 21, the stock didn’t even challenge resistance at $50. Without any big shake-ups on the horizon, we think traders can look at lower strike prices for their covered calls.
Daily Chart of The Coca-Cola Company (KO) — Chart Source: TradingView
The stock topped out at $48.50 after earnings, so that short-term resistance level could be a great strike price for a covered call.
We’d recommend looking at expirations in August. You want to find one with plenty of open interest so you can get in and out of the trade without trouble, and you should look for the right balance of premium and risk.
Remember, the longer you are in the trade, the more likely the stock is to shift before your expiration date.
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.
