This time of year is typically one of good cheer. Particularly in the stock market (see here and here). But there are always a few “Grinches” out there. Take for instance Coca-Cola stock (ticker KO). An iconic company and arguably one of the most recognizable brands of all time to be sure. Also one of the most “seasonal” stocks of all-time (see here, here, here and here). But awfully “stingy” around the holidays and early in the New Year.
The “Fizz Free” New Year Period
Extends from the close on December trading day #17 through the close of January trading day #20. Figure 1 displays the growth of $1,000 invested in ticker KO ONLY during this period every year since 1982.Figure 1 – Growth of $1,000 invested in KO from December trading day #17 through January trading day #20; 12/23/198112/15/2017)
For the record, the initial $1,000 has declined -65% down to $350.
During this period:
*KO was unchanged one year (1991)
*KO was up 6 times (17% of the time)
*KO was down 29 times (81% of the time)
*Average gain was +3.9%
*Average decline was -4.3%
The next “unfavorable” period begins at the close on 12/26/2017 and extends through 1/30/2018.
One Possible Strategy
This unfavorable period might be a good time for investors who hold KO stock to consider writing a covered call against their stock holdings. There are several factors to consider:
*Presumably you are holding KO shares and are not in a hurry to sell them.
*You have a plan in place regarding what you will do if KO shares rise above the strike price of the option you sell (i.e., will you buy back the call – possibly at a loss, or will you let the stock shares be called away?).
One example from last year appears in Figures 2, 3 and 4. This position assumes that an investor holds 1000 shares of KO stock and sells 5 covered calls against those shares (for the record, an investor holding 1,000 shares of stock could sell anywhere from 1 to 10 covered calls).Figure 2 – KO covered call on 12/23/2016 (long 1000 shares, short 5 Feb2017 42 calls) (Courtesy www.OptionsAnalysis.com)Figure 3 – KO covered call risk curves (Courtesy www.OptionsAnalysis.com)
Between December 23, 2016 (Dec TDM #17) and January 31, 2017 (Jan TDM#20) KO stock shares moved from $41.60 a share to $41.57. While the price move for the stock shares was negligible the Feb2017 42 call fell in value from $0.81 to $0.33. If the investors bought back the 5 calls at that price he or she would have added $240 of income to their account ($0.81-$0.33= $0.48 x 5 calls x 100 shares per call = $240).
Figure 4 – KO covered call on 1/30/2017 (Courtesy www.OptionsAnalysis.com)
There is no guarantee that KO shares will fall hard – or even fall at all – between 12/26/2017 and 1/30/2018. So a serious speculative position (shorting KO shares, buying KO put option, selling a call bear spread, etc.) may or may not generate positive results.
I do not offer “recommendations” and therefore am not recommending that KO shareholders sell covered calls. But I do try to present ”ideas”. And writing a covered call against a stock when it may “churn” for awhile is one potential way to gain an edge.
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.