Earlier, in our Notable Options post, I highlighted what looked like a bearish roll in puts in Coca-Cola (KO):
KO – Yesterday when the stock was $41.13 around noon it looked like a trader rolled a bearish position out a month, selling 18,000 Dec 42.50 puts at 1.42 to close and bought 18,000 Jan 42.50 puts for 1.67 to open.
This was interesting flow because it rolled an in the money put strike, which was likely protection against a long position.
KO has been a huge head-scratcher for me in 2014. Despite being only 7% from the 18 year highs made on November 28th, the stock is unchanged on the year, massively under-performing the broad market and sugar water peer Pepsi (PEP – disclosure long Jan put spread, read here) which is up 13% in 2014, but also down about 7% from the recent high.
Both KO and PEP trade at about 20x 2015 expected earnings and the disconnect with performance relative to the multiple squarely has to do with growth. Analysts expect KO earnings and sales to be flat year over year in 2015, vs PEP with expected earnings growth of 6% on 2% sales growth Both companies have dividend yields of about 3%, so they are regarded as defensive. But I think it is safe to say that both companies earnings are being actively managed (both will likely buy between $3 to $5 billion worth of stock in 2014).
So you have a situation where valuation seems rich for both relative to expected growth and historical valuation at a time where I see two obvious headwinds to earnings and sales growth, the strength of the dollar, and the weakness in emerging markets.
From a technical standpoint, KO seems to find support at $40, but has made (for now) a double top at $45, which should serve as fairly important resistance in the near term:
Longer term $45 is EPIC technical resistance
As for options prices, they are not particularly cheap, with 30 day at the money IV up about 80% from the 52 week lows made in Sept, despite yesterday’s broad market vol crush.
Normally we would look for opportunities to add yield to a long position in a stock like KO. but looking out to Feb, options look dollar cheap. For instance the Feb 45 calls with the stock at $41.55 are .22 bid. So if you sold those against long stock you would add less than a .005 % yield. Not attractive at all. And to be honest I’m not sure why you would sell a lower strike call with apparent room to run to $45.
If the stock were to rally into year end (towards the upper end of the recent band) and vol were to come in hard, we would be inclined to fade the move with long premium directional plays, with the intent to catch what I think could be a re-rating of KO in the face of no growth hurt by a strong dollar and weak emerging markets.