Coca Cola Case
New Trade Alert for (KO)
Buy Coca Cola January $40.00 Call @$4.50 or less
Risk Rating: 1.5 (1 = lowest 5 = highest)
Stocks have unwound again after the rally back to swing highs just two Tuesday’s ago when Tech posted an new all time high.
S&P was short by 70 points and the DOW dragged behind.
A tough week has DOW down 1000 points over the five days as an opportunity for Blue Chip buying at a discount.
Big picture view has seen a straight up move since 2009 and a 65% rally run in the last five years alone.
Conservative Coca- Cola has dropped from the $48 top to $42 support in just a few months.
KO has been largely left behind as it is up only 5% in the last five years.
This $6 pullback targets a measured move to $54 on a “V” recovery rally. That objective is 25% above.
The reward to risk favors the Bulls after this pullback.
Only close below the $40 on a weekly basis would negate this bullish buying premise.
The Options Way: Unlimited Upside Potential with Limited Risk.
A KO long call option can provide the staying power for a market upturn. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70% plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move. There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability.
That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With KO trading at $42.75, for example, an In The Money $40.00 strike option currently has $2.75 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the KO January $40 Call at $4.50 or less.
This option strike gives you the right to buy the shares at $40.00 per share with absolutely limited risk.
The January option has ten months for BULLISH development. A 66 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $450 or less paid per option contract. The upside is unlimited.
The KO option trade break-even is $44.50 at expiration ($40.00 strike plus $4.50 or less option premium). That is just 75 cents above the current price.
A push to the $48 high would would have the option gain more almost 100% to $8.00.