This time of year is typically one of good cheer. Particularly in the stock market (see here and here). But there are always a few “Grinches” out there. Take for instance Coca-Cola stock (NYSE:KO). An iconic company and arguably one of the most recognizable brands of all time to be sure. Also one of the most “seasonal” stocks of all-time (see here). But awfully “stingy” around the holidays and early in the New Year.
The “Fizz Free” New Year Period
Extends from the close on December trading day #17 through the close of January trading day #20. Figure 1 displays the growth of $1,000 invested in ticker KO ONLY during this period every year since 1982.
Figure 1: Growth of $1,000 invested in KO from December trading day #17 through January trading day #20; 12/23/1981, 12/15/2017)
For the record, the initial $1,000 has declined -65% down to $350.
During this period:
- KO was unchanged one year (1991)
- KO was up 6 times (17% of the time)
- KO was down 29 times (81% of the time)
- Average gain was +3.9%
- Average decline was -4.3%
The next “unfavorable” period begins at the close on 12/26/2017 and extends through 1/30/2018.
One Possible Strategy
This unfavorable period might be a good time for investors who hold KO stock to consider writing a covered call against their stock holdings. There are several factors to consider:
Presumably you are holding KO shares and are not in a hurry to sell them.
You have a plan in place regarding what you will do if KO shares rise above the strike price of the option you sell (i.e., will you buy back the call – possibly at a loss, or will you let the stock shares be called away?).
One example from last year appears in Figures 2, 3 and 4. This position assumes that an investor holds 1000 shares of KO stock and sells 5 covered calls against those shares (for the record, an investor holding 1,000 shares of stock could sell anywhere from 1 to 10 covered calls).
Figure 2: Courtesy OptionsAnalysis.com
Figure 3: KO covered call risk curves OptionsAnalysis.com
Between December 23, 2016 (Dec TDM #17) and January 31, 2017 (Jan TDM#20) KO stock shares moved from $41.60 a share to $41.57. While the price move for the stock shares was negligible the Feb2017 42 call fell in value from $0.81 to $0.33. If the investors bought back the 5 calls at that price he or she would have added $240 of income to their account ($0.81-$0.33= $0.48 x 5 calls x 100 shares per call = $240).
Figure 4: Courtesy OptionsAnalysis.com
Summary
There is no guarantee that KO shares will fall hard – or even fall at all – between 12/26/2017 and 1/30/2018. So a serious speculative position (shorting KO shares, buying KO put option, selling a call bear spread, etc.) may or may not generate positive results.
I do not offer “recommendations” and therefore am not recommending that KO shareholders sell covered calls. But I do try to present ”ideas”. And writing a covered call against a stock when it may “churn” for awhile is one potential way to gain an edge.