Top Trade Alert – April 24 – 2023 – Coca Cola (KO)

    Coke Vending

    You know how a picture is worth 1,000 words?  Well here’s why Coke (KO) is a great stock to own in troubled times:


    What else do you generally expect to have at your fingertips ANYWHERE on the planet Earth?  That’s because KO doesn’t sell snacks or even merchandise – they sell drinks and they sell them everywhere to everyone.  I interviewed KO’s ex-CEO Muhtar Kent back in 2010 and I don’t know James Quincey but not too much has changed in a dozen years. 

    The company has divested a lot of its bottling operations to concentrate more on the core concentrate production and brand-building.  They’ve acquired all or part of Costa Coffee, Honest Tea, ZICO Coconut Water, Fairlife Milk, Topo Chico Hard Seltzer, and BodyArmor and launched Coca-Cola Energy, Coca-Cola Plus Coffee, Powerade Ultra and Powerade Power Water.

    KO April 24 2023

    As you can see, the stock is up over 100% from $30 (there was a split in 2012) when I did that interview and in 2035 it will very likely be at $130 but the nice thing is it will be Despacito (slowly) and that makes it a fantastic stock for our Income Portfolio, which seeks to generate a 2% quarterly income from our holdings while still growing the principle.

    KO pays a $1.84 dividend, which is about 3% of $64 but we can do better by NOT buying the stock and taking the following spread:

      • Sell 5 KO 2025 $60 puts for $3.75 ($1,875)
      • Buy 15 KO 2025 $60 calls for $9 ($13,500) 
      • Sell 10 KO 2025 $72.50 calls for $2.80 ($2,800)
      • Sell 10 KO July $65 calls for $1.45 ($1,450) 

    That net $7,375 on the $18,750 spread that’s $6,000 in the money to start.  The upside potential is $11,375 (154%) at $72.50 or higher and, if KO doesn’t leap higher (not likely) then we can collect $1,450 per quarter for 6 quarters while we wait and that’s $8,700 – more than we paid for the spread!  

    More importantly, it’s 19.66% back on our $7,375, which is miles over our 2% goal in a very conservative trade with a low chance of failure.  The 5 short puts obligate us to buy 500 shares of KO at $60 ($30,000) but that only uses $3,746.43 of Portfolio Margin – so not worth worrying about.  In an IRA account, simply don’t sell the short puts and pay $1,875 more for the spread – it still works out great. 

    Those are the kinds of trades we’ll be adding to our Income Portfolio.  While we will have Portfolio Margin in that account we’ll still consider a trade like that to be using a $15,000 allocation, roughly 10% of our $150,000 total.  So let’s say we have 10 of those positions and we’re netting $7,000 per quarter from our various activities.  That’s going to be almost 20% per year in options sales alone.  If, 2 years from now, KO is up 20% at $77, we will have doubled our money AND our quarterly returns should double as well.  

    You can see how quickly these things build up….