Coca Cola (KO) gapped lower following its Q1 results reported April 20th. Following that 8% 2 day move lower the stock found its footing and has since been bouncing in a range between 44 and 46. On May 10th we established a short biased trade as the stock again approached technical resistance at 46. When the stock was 45.65 we looked to finance August puts (that capture the Q2 earnings report) by selling June puts of the same strike. With June expiration tomorrow it’s a good point to check in on the trade and see what can be done as far as management. Here was the original trade:
*KO (45.65) Buy the June/Aug 44 put calendar for .60
- Sell to open 1 June 44 put at .38
- Buy to open 1 Aug 44 put for .98
With the stock now 44.10 the August puts are worth 1.15 vs the .60 initial cost. We’re going to roll the short strike out and down, establishing a vertical spread in August: [private]
- Sold to open the August 42 puts at .50
New Position – KO (44.10) August 44/42 put spread for 10 cents (currently worth .60)
Rationale – This basically creates a free look for a lower move over the Summer where we’re now risking just .05 with the possibility of making 1.95 on a move below 42. This has a few months to play out and this trade capture the next known catalyst with earnings coming during August expiration.