Back on Feb 10th, following KO’s Q4 results, we placed a short term bearish trade as we felt the stock’s gains of 3% on the results delivered was unwarranted. A month later the stock was 5% lower, rendering our trade a winner (read below).
On the eve of KO’s Q1 results, the stock is down 3% on the year, and just now trading at the high end of the one month range:
The options market is implying about a 2.5% one day move following the results, which is shy of the 4 qtr average of about 3.85%. Given the stock’s under-performance ytd, the very well known concerns about their exposure to the strong dollar and most importantly the price action of stocks like INTC and PM (who had been hammered in Q1 on strong dollar exposure) following their recent results, currency headwinds could be in the shares for the time being.
Without some sort of structural change to their business, KO is challenged in my opinion, trading at 20x 2015 earnings that are expected to decline for the second year in a row, with their third consecutive sales decline. The are reliant on a product that the developed world is fairly well convinced is unhealthy, and much of their future growth is expected to come from emerging markets which seem to be dead in the water for the time being as it relates to economic growth.
But in the near term, playing for a breakdown below long term support at $40 seems like a press as weak q2 guidance is for the time being taken in-stride when the reason is the strength of the dollar.
[caption id="attachment_52960" align="aligncenter" width="600"]
KO from Jan 2014 to present from Bloomberg[/caption]
If the company is able to meet expectations, and possibly guide in line for Q2 then I suspect the stock could rally a buck or so, in line with the implied move. A low premium way to express this view is to isolate $42 in weekly options with a slightly out of the money fly:
TRADE – KO ($40.82) Buy to April 24th weekly 41/42/43 call butterfly for .20
-Buy 1 April 24th 41 call for .50
-Sell 2 April 24th 42 calls at .18 each of .36 total
-Buy 1 April 24th 43 calls for .06
Break-Even on April 24th weekly expiration:
Profits: between 41.20 and 42.80 make up to 80 cents with max gain of .80 at 42
Losses: between 41 and 41.20 & between 42.80 and 43 lose up to 20 cents, max loss of 20 cents below 41 and above 43
Rationale: This offers a great risk/reward on a move to 42 and is the lowest premium outlay available to position for that. The problem with the trade, obviously, is commissions on small lots which can make total premium outlay from a percentage perspective worse for such a small width fly. E.g. -The 41/42 call spread has lesser commissions but at around .31 has a higher breakeven and worse risk/reward, risking .31 to make .69 vs risking .20 to make up to .80, and a wider range to the upside to achieve. This sort of trade using weeklies has the potential to be binary which is one reason why I am looking for the lowest possible premium outlay.
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Previous Post March 11th, 2015: Trade Update – Closing $KO March Put Spread for a Triple
A month ago we looked to fade Coke’s (KO) post earnings bounce (read below.) We entered the short biased trade when the stock was $42.55 and now with the stock at $40.25, down 5%, and nearing our short strike of the March put spread, the trade is worth 3x what we paid. We’ll take today’s weakness as an opportunity to close the position:
ACTION – Sold to close the KO ($40.25) March 42/40 Put Spread at 1.55 for a $1.05 profit.
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New Trade – Technical $KO
On Friday’s Options Action my co-panelists Mike Khouw and Carter Worth offered a bearish view on shares of Coca-Cola (KO) from both a technical and fundamental standpoint (read and watch below). Here was the main issue I had with the trade idea (in bold), this coming a few days after I made a very bad trade in Disney (DIS) into their earnings report:
It’s been hard to argue with Carter’s technical views of late, and as I made it clear in the clip, I am not a fan of the multiple being paid for low growth U.S. multi-nationals like KO that will likely face increased headwinds from the strong dollar as foreign centrals banks have a whole heck of lot more to gain by debasing their currencies vs the dollar than the reverse at the moment. The one issue I have with the trade is how far out of the money the put spread is, especially after the stock is already down almost 10% from the recent highs. While April expiration gives plenty of time for the thesis to play out, if the stock were to bounce initially this put spread would have a fairly small probability of being in the money. So in my mind it is a matter of conviction, If I felt strongly in their technical and fundamental view and thought the stock could re-test $40, and that next weeks earnings and guidance could be the catalyst I might consider buying short dated nearer to the money puts. We will be sure to take a closer look prior to the print.
Well the company issued a beat, and the stock is up 3.5% as I write. Here are some of the headlines coming out of the call, from Bloomberg:
*COCA-COLA SEES 2015 AS TRANSITIONAL YEAR FOR COMPANY
*COCA-COLA SEES GLOBAL ENVIRONMENT REMAINING VOLATILE
*COCA-COLA SEES IMPROVING US ECONOMIC ENVIRONMENT
*COCA-COLA SEES RETURN TO HIGH-SINGLE DIGIT GROWTH IN 2016
*COCA-COLA SEES BENIGN COMMODITY ENVIRONMENT
*COCA-COLA SAYS WATCHING IMPACT OF QE IN EUROPE
*KO SAYS CONFIDENT IN RETURNING TO L-T SUSTAINABLE GROWTH
To me the commentary is weak at best and the rally appears to be a relief one as investors and traders appeared to be positioned for a downgrade to guidance. I stand by my view (above) that paying 21x for NO earnings or sales growth and a goal of returning to sustainable high single digit growth in 2016, is “hopeful.”
I would like to be at my high-school playing weight of about 180 pounds at some point in 2016, but at this point I wouldn’t bet on it. Yeah it’s a Buffett name and has a dividend yield of 2.86%, but that multiple is reaching 10 year highs at a time where currency headwinds could become more pronounced as the year progresses and their exposure to weak emerging markets could also start to hurt:
So I did not have the conviction to press what was in hindsight poor sentiment, and a possible oversold condition, but I do now. Here is the trade:
TRADE: KO ($42.55) Buy to open March 42/40 Put Spread for 50 cents
-Buy to open 1 March 42 put for .72
-Sell to open 1 March 40 at .22
Break-Even on March Expiration:
-Profits: between 41.50 and 40, make up to 1.50, max gain of 1.50 below 40
-Losses: up to .50 between 41.50 and 42 max loss of .50 above 42
Rationale: The forward guidance appears to be murky at best, and the technical set up looks weak, but playing for a near term breakdown below $40 could be optimistic:
Therefore the put spread with a possible 3 to 1 payout seems like the correct structure.
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Original Post Feb 8th, 2015: Options Action Recap – 2/6/15: $DIS, $F, $KO, $GMCR, $XLU
On Friday’s Options Action on CNBC I detailed a longer dated bullish trade idea in Ford (F) and gave a quick update the disastrous Disney (DIS) trade from the prior week, and a bearish trade idea in the Utilities etf (XLU) that started to be work all at once Friday afternoon.
Additionally, my friends Mike Khouw and Carter Worth shared a trade idea to express a near term bearish view on Coca-Cola (KO) that I included in this post, plus updates to their bearish calls in Keurig Green Mountain (GMCR) from the prior week.
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Name That Trade – $F: Ford Pick-up?
I would like the stock to re-trace a bit, possibly back to $15.50 before I pull the trigger, but here is the trade I would choose at the moment if I just couldn’t help myself:
Hypothetical Trade: F ($15.90) Buy to Open May 16 calls for .70
Break-Even on May Expiration:
Profits: above 16.70, up 5%
Losses: up to .70 between 16 and 16.70 with max loss of .70 or 4.5% of the underlying stock price.
Rationale: Given the stock’s recent volatility, and the general cheapness of options, risking 4.5%for 3 months, with no shortage of stock specific data in between these calls seem dollar cheap. But I’d rather pay less for them on a slight pullback and catch the potential breakout above 16, offering the potential to spread by selling a higher strike call to reduce my break-even and premium at risk.
Watch here:
For more detail, read here
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Mike and Carter had the following to say about Coca-Cola (KO):
Carter’s technical view on KO is decidedly bearish, his work suggests that the failure at $45 twice in the last year (which was also the all time high from the 1990s), followed by gaps lower, “looks like a major topping-out formation, and breaks the uptrend”:
While Mike sees valuation not particularly expensive to its historical multiple, but he is concerned with the lack of any sales growth and the secular headwinds that face a company who business it is to sell sugar water the stock could also be set to hit a rough patch.
Mike’s trade was to simply buy the April 40/38 Put Spread for 40 cents (stock ref ~$41.70), max risk of 40 cents, above $40, gains of up to $1.60 between $39.60 and $38, max gain of $1.60 below $38:
MY VIEW ON THEIR TRADE IDEA: It’s been hard to argue with Carter’s technical views of late, and as I made it clear in the clip, I am not a fan of the multiple being paid for low growth U.S. multi-nationals like KO that will likely face increased headwinds from the strong dollar as foreign centrals banks have a whole heck of lot more to gain by debasing their currencies vs the dollar than the reverse at the moment. The one issue I have with the trade is how far out of the money the put spread is, especially after the stock is already down almost 10% from the recent highs. While April expiration gives plenty of time for the thesis to play out, if the stock were to bounce initially this put spread would have a fairly small probability of being in the money. So in my mind it is a matter of conviction, If I felt strongly in their technical and fundamental view and thought the stock could re-test $40, and that next weeks earnings and guidance could be the catalyst I might consider buying short dated nearer to the money puts. We will be sure to take a closer look prior to the print.
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And lastly we did a quick look back at my prior week’s disastrous bearish trade on Disney (DIS), and Mike and Carter’s bearish trades on GMCR that worked out well, and my bearish XLU trade from late December that started to out in a big way on Friday:
For more on my DIS trade, and why I was so disappointed with myself, read here.
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Lastly we had former J.P. Morgan strategist Tom Lee, founder of advisory firm FundStrat, on to discuss his street high bullish target for the S&P 500. It was an interesting discussion but I am not sure I took away much other than the bull market should continue because most want it to end and that its been around for six years now, so why should it stop?
Watch here: