Coca-Cola Co. (NYSE: KO) stock is falling as investors seem to be rotating money out of defensive stocks like KO and Colgate-Palmolive (NYSE: CL) and into more aggressive stocks. Yesterday's rally has continued this morning despite Fed Chairman Bernanke warning that a recession is possible. This could be a case of investors thinking that by the time anyone acknowledges a recession, the bottom has already happened in the markets. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KO.
After hitting a one-year low of $48.05 last April, the stock hit a one-year high of $65.59 in January. This morning, KO opened at $61.44. So far today the stock has hit a low of $60.21 and a high of $61.44. As of 12:45, KO is trading at $60.47, down $0.97 (-1.6%). The chart for KO looks neutral and improving, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.
For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $70 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in four and a half months as long as KO is below $70 at August expiration. Coca-Cola would have to rise by more than 15% before we would start to lose money. Learn more about this type of trade here.
KO hasn't been above $66 at all in the past year and has shown resistance around $62 recently. This trade could be risky if the company's earnings (due out in mid-April) are a positive surprise, but even if that happens, this position could be protected by resistance KO might find at its year high, which is around $65.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent controls a bullish hedged position in KO. Both that trade and the one above can both expire profitably at the same time.
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