Coca-Cola is a great defensive play in a volatile market with a beta of just 0.19, according to IBD MarketSurge.
Coca-Cola stock pays a 2.73% dividend yield, and income investors might consider a strategy known as a covered call to further enhance the yield.
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 Coke might take shape.
Buying 100 shares of Coca-Cola stock would cost around $6,933.
A Sept. 20, 70-strike call option is trading around $1.40, generating $140 in premium per contract.
Trade Offers 23% Annualized Return
Selling the call option generates an income of 2.06% in just over one month, equaling around 15.67% annualized.
If Coca-Cola closes above 70 on the expiration date, the shares will be called away at 70, leaving the trader with a total profit of $207. (That's the gain on the shares plus the $140 option premium received.)
That equates to a 3.05% return, which is 23.17% on an annualized basis.
Of course, the risk with the trade is that Coca-Cola stock 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.
Coke May Outperform In Volatile Market
Coca-Cola stock could be a lower-risk option during a period of heightened market volatility. In premarket trading Monday, the stock was down less than 2%.
According to the IBD Stock Checkup, Coca-Cola stock is ranked No. 3 in its industry group and has a Composite Rating of 94, an EPS Rating of 78 and a Relative Strength Rating of 83.
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
