The major stock indexes had a rocky start to the week because news came out that there was a new strain of the novel coronavirus that causes COVID-19. The news of more lockdowns and travel restrictions sent oil and equities lower at the open Monday morning.
There could be more bad news on the way regarding these new coronavirus variants. As CNBC wrote yesterday:
The new coronavirus strain that was first detected in the United Kingdom could already be circulating in the United States without notice, the U.S. Centers for Disease Control and Prevention said Tuesday.
While the variant hasn’t yet been found in the U.S. yet, the CDC noted that scientists haven’t sequenced the genetic coding for many Covid-19 infections here. So it could have slipped notice.
On Monday, despite unemployment, slow growth, travel restrictions and an ongoing global recession, investors bought the dip. As we have said before, while this is a risky market, it’s not completely irrational to assume the economy will turn the corner in 2021 and stocks should be higher, but we still want to be careful.
The reaction to yesterday’s news that a new strain of coronavirus could be in the U.S. is a good reminder that caution is necessary. The fear about new problems from COVID-19 erased a lot of Monday’s bullish buying.
Despite the good news, rising infection and death rates in the U.S. will likely lead to another round of semi-lockdowns or travel restrictions after Christmas.
As frustrating as that is for all of us, it should also give investors another chance to capitalize on their favorite “stay-at-home” picks from this past year. In our case, we think we should bet on increased demand for video conferencing and PC audio equipment, which is where Logitech (NASDAQ:LOGI) earns much of its margins these days.
We recommended selling puts against the stock, and thanks to its jump higher on Monday, we were able to close those put writes early and lock in a profit.
We still like Logitech, and we think its position in the high-end webcam and peripherals market is defensible, but we’re going to wait for another dip before we enter a new position on the stock.
So now where can we turn our bullish selling? We’d argue that The Coca-Cola Company (NYSE:KO) is a great target for a bullish put write.
A Different Kind of Consumer Stock
The stimulus package has passed both the House of Representatives and the U.S. Senate and exceeded our expectations in terms of total spending — $900 billion versus $750 billion expected.
The bill includes enough support for consumers through direct payments and unemployment benefits to support spending in the short term.
With the stay-at-home stocks riding high again, consumer staples are a segment of consumer stocks worth considering as replacement positions.
As we are often fond of saying, during good times, people celebrate with a Coke. During bad times, they comfort themselves with a Coke.
The Coca-Cola Company hasn’t had an easy time this year. As Zacks notes:
The coronavirus pandemic has hit all segments hard and the beverage industry is no exception. The Coca-Cola Company KO is among the beverage companies that have been focusing on restructuring to make good the losses suffered due to the closure of the away-from-home channel. Notably, on-premise avenues, including restaurants, bars, movie theaters and stadiums, which are key contributors to sales, have remained closed since the onset of the pandemic in March, which is hurting revenues.
The soft-drinks giant’s revenues for third-quarter 2020 declined 9% year over year, driven by a decrease in away-from-home channels like restaurants, sporting events and movie theaters.
The company is now planning on restructuring, cutting more than 2,000 jobs worldwide.
But still, some analysts like the stock because it pays a strong dividend. In the short term, we think they’re correct. KO may see some additional buying in the last two weeks of the year, making it an excellent target for a bullish put write position.
Looking for a Stable Start to the New Year
Coca-Cola stock dipped to support Monday morning as the market declined, but its support held. We think investors will be looking to reallocate to the big dividend payers during the slow Christmas week.
With the new stimulus package on the way, exposure to consumer stocks is important, so Coca-Cola Company stock can help traders earn extra income while they wait for stocks like Logitech to pullback.
Daily Chart of Coca-Cola Company – Chart Source: TradingView
KO is forming a bullish inverse “head-and-shoulders” pattern which will be confirmed if the stock closes above the neckline near $54 per share.
Selling puts with a lower strike price gives traders a chance to take advantage of the upside potential but remain safe if the stock continues to channel in its current range and does not break out before the new year.
KO’s support at $52 would, therefore, make an excellent strike price for a put write. When looking for expirations, pick one that offers a decent premium without obligating you for too long. We recommend staying in the mid-January range.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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