Revisiting a recent article, I spoke about timing as a key issue for entry into Coca-Cola (KO). I also suggested a short-term options play while waiting for a good entry point. This gives a good example how one can invest long term and still make money using short-term options strategies. This was the original suggestion:
The Options Play
The stock is trading at $37.65 and I would make the first play on my bearish income strategy in the money as I believe the headwinds for the stock will continue to take it down for a season.
- Buy a November put with a strike of '38.75' (priced at $1.59)
- Sell a November put with a strike of '37.50' (priced at $0.90)
- Net Debit to Start: $0.69
- Maximum Profit: $0.56
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Currency exchange could keep profits minimal.
- Commodity costs higher and margins lower.
- Passing this cost on to consumers could backfire on the company.
- Sell November 38.75 put for $1.76
- Buy November 37.50 put for $0.79
- Gross Profit: $0.97
- Net Profit: (gross profit $0.97 - net debit $0.69)= $0.28
ROI: 40.5%
Now we start with another buyback program through KO and I must reemphasize, this company is a great long-term buy. Recently the board authorized a new stock buyback program of 500 million shares. It will start at the end of the one started in 2006 and has a price tag target of close to $3 billion in net share repurchases this year. For 28 years the corporation has been doing this with its cash-rich chauffeurs. This continues to add value to shareholder stocks and allows the company to continually increase its dividend as it has for the last 50 years. This company knows how to increase shareholder value year after year.
(click to enlarge)
Technically Speaking
Until it reached its high of just over 40 in early August, KO was in a long-term bullish trend. Since that time it has been moving down. How low will it go before it stops? The stock is still moving down and the RSI indicator supports the weakness of the stock. It has been mostly below the '50' mark since its present trend. Twice it barely pushed above it. The MACD also has lived below the '0' line, which is considered bearish territory so it supports the RSI. The Bollinger Bands look like they have been moving sideways and we could see the stock move up to about 38.5 before it continues down. I am waiting to see if the 50-day MA becomes resistance or not.
The Options Play
The stock is currently trading at $37.04 and I believe it will have more room to move down in the short term.
- Buy the January 2013 put with a strike of '36.25' (priced at $.87)
- Sell the January 2013 put with a strike of '35.00' (priced at $0.50)
- Net Debit to Start: $0.37
- Maximum Profit: $0.38
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Pattern looks to be bearish in nature.
- Profits not so good.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
