Options for stock investors. A better way to trade.

New Trade Alert February 10th – Coca Cola

Coca Cola Smile

New Trade Alert for (KO)

Coca Cola January $38.00 Call @$5.75 or less

Risk Rating: 3     (1 = lowest   5 = highest)

Above Break Even Probability: 52%

Max Loss Probability: 21%


A shake out shift has seen momentum stocks nosedive pressing the NDX Nasdaq 100 near bear territory.  The nearly 20% fall has been fast with all time highs in the Tech measure just three months ago December 2nd.


Stocks have seen a rotation back into the safety of boring, basic big boys like sullen DOW stocks.   Wal-Mart is plus 8% in the New Year following the brand boomerang ala McDonald’s in 2015.


Coca Cola is a sideways stock tracking between $38 and $44 for almost four years.  The last two years of action have KO mostly from $40 and $44 with support to lean on at the $42 mid-point pivot.

Performance is positive over the last year of trade with a 1% gain.

An upside breakout targets $48 which is 15% above present prices.    


Only close below the $38 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 are 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 $38.00 strike option currently has $4.75 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 Jan $38 Call at $5.75 or less.

This option strike gives you the right to buy the shares at $38.00 per share with absolutely limited risk.  


The January 2017 option has nearly eleven months for BULLISH development.   An 80 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $575 or less paid per option contract.   A stop loss at half of premium paid reduces the dollar exposure.  The upside is unlimited.


The KO option trade break-even is $43.75 at expiration ($38.00 strike plus $5.75 or less option premium). That is just $1 above the current Gold Miners ETF price.


A push above the $44 range targets top targets $48.  At that stock price level the option investment would gain nearly 100% to $10.00. 

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