Coke Stock: Playing Defense With This Beverage Titan's Shares
GAVIN McMASTER
With volatility elevated and the market in correction, it might be a good idea to look at some income trades on defensive names, such as Coca-Cola (KO). Coke stock has been a strong performer in the last few months, rising 16% since mid-January. It also pays a solid dividend of 2.71% with a very low beta of 0.07.
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Income investors that want to increase the yield on this defensive stock could look at a covered call trade.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch? Upside remains limited above the covered call strike.
Let's look at how a covered call trade on Coke might take shape.
Details On A Covered Call
As of Tuesday's close, buying 100 shares of Coke would cost around $7,180. A Sept. 19, 72.50-strike call option is trading around $3.70, generating $370 in premium per contract. Meanwhile, selling the call option generates an income of 5.4% in five months, equaling around 12.7% annualized.
If Coke stock closes above 72.50 on the expiration date, the shares will be called away at 72.50, leaving the trader with a total profit of $440. That's the gain on shares plus the $370 option premium received.
That equates to a 6.46% return or 15.12% on an annualized basis, which is not bad in this volatile environment. Of course, the risk with the trade is that Coke stock might drop, which could wipe out any gains made from selling the call. Notably, the loss would be a little less than owning the stock by itself since you offset some of the loss with option premium collected.
Covered calls can be an effective strategy for generating income and managing downside risk. Further, it can reduce the effective purchase price of a stock.
Ratings For Coke Stock
According to the Investor's Business Daily's Stock Checkup, Coke stock ranks No. 5 in its group. It also has a Composite Rating of 94 out of a best-possible 99, an EPS Rating of 79 and a Relative Strength Rating of 90.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options and is very conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
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