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In the current market environment, investors might be more interested in generating income rather than capital gains.
Today, we’re looking at two covered call examples on Coca-Cola stock. The first step to finding our covered call candidates is to use the Stock Scanner with the following parameters:
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Which produces the following results:
Coca-Cola (KO) is up 10.63% in the last three months and is currently showing a dividend yield of 2.64%. The stock also has a high IV Percentile which means options are expensive compared to the recent past.
Using options, we can generate an additional income from high yielding stocks via a covered call strategy.
KO Covered Call Example
Let’s look at two different covered call examples on KO stock. The first will use a monthly expiration and the second will use a seven-month expiration.
Let’s evaluate the first KO covered call example.
Buying 100 shares of KO would cost around $8,263. The July 17, 83-strike call option was trading on Friday for around $1.14, generating $114 in premium per contract for covered call sellers.
Selling the call option generates an income of 1.4% in 20 days, equalling around 25.5% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 83?
If KO closes above 83 on the expiration date, the shares will be called away at 83, leaving the trader with a total profit of $151 (gain on the shares plus the $114 option premium received). That equates to a 1.9% return, which is 33.8% on an annualized basis.
Instead of the July 17 call, let’s look at selling the December 85-strike call instead.
Selling the December 85-strike call option for $3.55 generates an income of 4.5% in 174 days, equalling around 9.4% annualized.
If KO closes above 85 on the expiration date, the shares will be called away at 85, leaving the trader with a total profit of $592 (gain on the shares plus the $3555 option premium received).
That equates to a 7.5% return, which is 15.7% on an annualized basis.
These figures don’t include any potential dividends received during the course of the trades.
Of course, the risk with the trade is that the KO might drop, which could wipe out any gains made from selling the call.
Barchart Technical Opinion
The Barchart Technical Opinion rating is a 100% Buy with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Implied volatility is at 19.69% compared to a 12-month low of 12.84% and a 12-month high of 23.83%.
The Coca-Cola Company’s strong brand equity, marketing, research and innovation help it to garner a major market share in the non-alcoholic beverage industry.
The company is making investments in healthier alternatives like coffee, sparkling water and sports drinks.
The roll out of Coca-Cola Energy, Coca-Cola Plus Coffee, Powerade Ultra and Powerade Power Water are some additions on these lines.
The company’s portfolio includes beverage products, spanning from sodas to energy drinks.
In addition to its sparkling soft drinks, the company sells a large range of still beverages including water, enhanced water, juices and juice drinks, sports drinks, ready-to-drink teas, coffees and dairy and energy drinks.
Most of the company’s beverages are manufactured, sold and distributed by independent bottling partners.
Coca-Cola currently reports operating results under the following segments – Europe, Middle East and Africa; Latin America; North America; Asia Pacific; Global Ventures; Bottling Investments and Corporate.
Of the 24 analysts following the stock, 18 rate it as a Strong Buy, 2 as a Moderate Buy and 4 as a Hold.
Covered calls can be a great way to generate some extra income from your core portfolio holdings.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
