With stocks pulling back, it might be a good idea to look at some income trades on defensive names.
Coca-Cola stock has had a tough couple of months, with the stock dropping 12% in three months.
That has seen the dividend yield jump up to 3.1% with a very low beta of 0.07.
The Coca-Cola Company leverages its strong brand equity, innovation and marketing to maintain a dominant market share in the nonalcoholic beverage industry, offering a diverse portfolio that includes sodas, sparkling water, coffee, energy drinks and more.
Its operations span multiple global segments, with most beverages produced and distributed through independent bottling partners.
Income investors who want to increase the yield on this defensive stock could look at a covered call trade.
Coca-Cola Option Generates $135
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike price.
Let's look at how a covered call trade on Coca-Cola might take shape.
Buying 100 shares would cost around $6,290, based on Tuesday's closing price.
A Feb. 21, 65-strike call option is trading around $1.35, generating $135 in premium per contract.
Selling the call option generates an income of 2.91% in just over two months, equaling around 10.96% annualized.
If Coca-Cola closes above 65 on the expiration date, the shares will be called away at 65. That leaves the trader with a total profit of $345. (The gain on the shares plus the $135 option premium received.)
Coca-Cola Trade Could Return 5.59%
That equates to a 5.59% return, which is 27.94% on an annualized basis.
Of course, the risk with the trade is that Coca-Cola shares might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
According to the IBD Stock Checkup, Coca-Cola is ranked No. 9 in its industry group. It has a Composite Rating of 51, an EPS Rating of 74 and a Relative Strength Rating of 24.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
