Putting the Pop Back in Coca-Cola's Flat Shares -- Barrons.com
DOW JONES & COMPANY, INC. 12:46 PM ET 2/13/2017
Coca-Cola is losing its fizz, but there's a way for investors to recarbonate their shares.
With the stock down on another tepid earnings report and management warning of continued operating pressures, investors can "overwrite" the stock to enhance their returns.
The strategy essentially pays investors for agreeing to sell their stock at a higher price by selling call options. If you can live with the specter of selling your shares -- and this could be hard for the millions of people who have owned this stock for years, and sometimes generations -- the overwrite strategy is worth considering.
All you have to do is determine at what price you would be willing to sell your shares. Then you look at the various "premiums," or options prices, that seem attractive to you. The farther out you go on the expiration cycle, the more money you will receive for selling the call.
Of course, time is risk. Most investors try to sell calls that expire in under three months and simply reset the trades. Sometimes, as is the case with Coca-Cola, the near-term premiums are not significant, and it is necessary to pick options that expire in six months to a year.
Consider this example: With Coca-Cola's stock at $40.67, sell the January $45 call at 55 cents. If the stock remains below the strike price, you keep the premium received for selling the call. Should the stock price exceed the strike price at expiration, you are obligated to sell the stock, or cover the call at a higher price.
At present, Coke's stock seems more likely to decline than advance. The stock is hovering above a 52-week low, and the chart suggests support is shaky. Over the past 52 weeks, the stock has ranged from $39.88 to $47.13.
A strong argument can be made for simply riding out Coca-Cola's weakness. The minute you start trading options against a long-term position, you are moving from passive to active management. There's nothing wrong with that, and it is the pathway followed by many shrewd investors, provided you understand that the options market is an aggressive, tough place that will seize your stock if it can.
If you understand those terms and are not pathologically in love with your stock, overwriting is often a great way to enhance returns on moribund equities.
STEVEN SEARS is the author of The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails. Comments: steve.sears@barrons.com Follow: @sm_sears
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02-13-171246ET
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