While investors with a long-only portfolio of quality stocks will eventually have success, in the short run it can be a bumpy ride. Options can be used as a hedge by providing negative exposure to sectors and names that are likely to underperform. If implemented correctly, this can increase returns and reduce risk in a portfolio.
Coca-Cola is a popular stock and a well-run company. Yet with low options prices and a steep stock valuation, a put option could be an attractive play, especially as shares trade below resistance at the 50- and 200-day moving averages.
In this shorter-term trade, investors can buy the 61 put with a Feb. 24 expiry. This put has a cost of $1.45, which equates to a maximum loss of $145 in the event Coca-Cola stock trades above 61 on expiry.
This trade has a break-even price of 59.55 and could earn multiples of profit in the event of a steep decline in Coca-Cola's share price.
Feb. 24's options currently have an implied volatility of 19.5%, which is lower than the 23% and 21.5% annualized volatility Coca-Cola has realized over the past 30 and 200 days, respectively.
Coca-Cola To Report Earnings On Valentine's Day
While market volatility is expected to be lower over the next few weeks, Coca-Cola will report fourth-quarter earnings on Valentine's Day. Analysts estimate EPS of 45 cents on revenue of $9.91 billion. As with most large-cap consumer staples companies, earnings moves are generally modest.
Coca-Cola stock has only realized an average 2.3% move on its earnings events. Nevertheless, with the market implying a 2.5% move, there isn't much to lose if the company has another muted move. At the same time, there is a lot to gain in the event of an unlikely downside blowout.
Valuationwise, Coca-Cola has a price-earnings ratio of 24, which may have been a fair valuation when yields were under 2%. But it certainly seems elevated for a mature company in an environment with 4.5% Treasury yields.
Despite being a dividend aristocrat, Coca-Cola yields only 2.9%, making the aforementioned Treasurys far more competitive incomewise. While a rethinking of the valuation may be necessary, it is unlikely to happen quickly.
Coca-Cola stock has an IBD Composite Rating of 57. Shares have been trading sideways, although are turning lower after hitting resistance at both the 50- and 200-day lines. Momentum is lower with shares displaying a Relative Strength Rating of 44.
