KO Analysis

The beverage company The Coca-Cola Co. (KO), headquartered in Atlanta, Georgia, is showing implied volatility in the upper half of its one-year range and so qualifies for further analysis.

[KO in Wikipedia]

KO

I shall use the OCT series of options, which trades for the last time 36 days hence, on Oct. 21.

Ranges

Implied volatility stands at 18%, which is 1.1 times the VIX, a measure of volatility of the S&P 500 index. KO’s volatility stands in the 50th percentile of its annual range. The price used for analysis was $42.12

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	44.56	46.99	N/A
Lower	39.68	37.25	NA
Gain/loss	±$2.44	±$4.87

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

KO has been stairstepping lower since April 8m with the most recent punch to the downside beginning Sept. 8.

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

Zacks Investment Research gives the company a neutral ranking.

Brokerages in aggregate give KO a negative 15% enthusiasm rating, with 38% of 13 analysts issuing strong buy recommendations.

The evidence ranges from indifferent to bearish. I shall use a bearish vertical options spread as my strategy.


Bear call spread, short the $43 calls and long the $44 calls,
sold for a credit and expiring Oct. 22.
Probability of expiring out-of-the-money

OCT	Strike	OTM
	43	68.7%

The premium is $0.27, which is 27% of the width of the position’s wings.

The risk/reward ratio is 2.7:1.

The zone of profit in the proposed trade covers a $0.91 above the current price.

Decision for My Account

The risk is too high for the potential reward.

I calculate it this way: I use a hypothetical trade that puts $500 at risk. My goal is a maximum potential gain of at least $200, or $100 at my hypothetical 50% exit point. The maximum profit for this trade is $27 per contract, and the maximum loss is $73. Divide maximum loss into $500 and get seven contracts (rounded up). Multiply the maximum profit by the number of contracts and get $189, which is below the $200 goal.

Sure, it only falls short by $11 per contracts, but with seven contracts, that's $77 on a hypothetical trade that ideally sets up an exit with a $100 profit. Pretty significant in terms of the percentages.

I'm passing on the trade.The stock at the time of decision was priced at $42.09.

-- Tim Bovee, Portland, Oregon, Oct. 15, 2016

References

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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Disclaimer

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.

License



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Based on a work at www.timbovee.com.