Monday, February 8, 2016

KO Analysis

Update 3/19/2016: The put options in my KO iron condor have expired without value.

Overall, shares rose by 7.3% over 40 days, or a +67% annual rate. The options position produced a 1.1% loss on debit for a -10% annual rate.

Update 3/11/2016The short call leg of my KO iron condor was assigned overnight, dumping a short holding of KO shares into my account for a credit of $44 per share and allowing me to keep the full credit for the options of $0.30 per share. I responded by exiting the short shares for a loss of $1.15 per share and also the corresponding long calls leg at a $45 strike for a profit of  $0.20 per share, for a net loss of $0.95 per share.

I am  retaining both put legs -- short and long -- until the expire on Saturday, March 19 for a small profit.

At expiration I shall calculate the loss for the entire position.

The beverage company The Coca-Cola Co. (KO), headquartered in Atlanta, Georgia, publishes earnings on Tuesday before the opening bell.

[KO in Wikipedia]


I shall use the MAR series of options, which trades for the last time 39 days hence, on March 18.


Implied volatility stands at 23%, which is 0.9 times the VIX, a measure of volatility of the S&P 500 index. KO’s volatility stands in the 83rd percentile of its most recent range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The price used for analysis is $42.37.

The Trade

KO has been in a series of wide swings that produce a net sideways movement. The most recent reversal to the downside came on Dec. 13, setting off the beginning of a zig-zag to the downside that is still in early days.

Two out of the last four earnings announcements have resulted in price increases on the first subsequent day of trading.

Brokers in aggregate give KO a negative 6% enthusiasm index,  with 44% of 18 analysts issuing strong-buy recommendations.

In my judgement the best tactic is a direction-neutral play.

Iron condor, short the $44 calls and long the $45 calls,
short the $39 puts and long the $38 puts,
sold for a credit and expiring March 19.
Probability of expiring out-of-the-money


The premium is $0.30, which is 2.2% of the width of the position’s wings. The share price at time of entry was $42.48.

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $3.00 move either way. The biggest immediate move after each of the past four earnings announcements was $1.17, and the average was $0.52. After eliminating the maximum and minimum post-earnings movements, the core tendency is $0.41.

Decision for My Account

I've opened a position on KO as described above.

-- Tim Bovee, Portland, Oregon, Feb. 8, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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