Coca-Cola Stock Is Typically a Defensive Name. Options Data Says It’s Time to Go on the Offense.

With the world focused on the Iran conflict and the many ways the crisis could devolve, a defensive investment like Coca-Cola (KO) makes plenty of sense. KO stock isn’t just off to a good start, though its year-to-date performance of almost 8% doesn’t hurt. Further, the Barchart Technical Opinion indicator rates shares as a 40% Buy, pointing toward a bullish bias in maintaining the current trajectory.

For investors unsure of where to park their money, though, the stability of the underlying beverage business — and the tangible rewards that come with it — arguably provides the most appeal. No, the core products aren’t reinventing the wheel. But they serve as a cornerstone of everyday consumer needs. This dynamic has translated into 65 years of consecutive dividend increases, with a forward yield of 2.82%.

With the consumer staples sector average sitting at only 1.89%, KO stock is going to attract eyeballs.

Fundamentally, the market has been buoyed by management’s confidence in the company’s long-term progression. In February of this year, Coca-Cola stated that it expects to reach free cash flow of $12.2 billion, thereby creating a massive cushion for buybacks, strategic mergers and acquisitions and of course dividends. So, while KO stock may not have the chart-ripping firepower of a cryptocurrency, there is a clear incentive to buy.

In addition, the beverage giant has been more aggressive in its innovation pipeline. Perhaps most notably, Coca-Cola has shifted into higher-growth categories such as alcohol-ready-to-drink (ARTD) through various partnerships with well-known brands. This effort should contribute to higher margins than traditional sparkling beverages, enhancing the overall bullish case.

Finally, on a technical level, KO stock has encountered some near-term weakness. In the trailing month, the security is down more than 3%. Possibly, the relatively notable selloff — we’re talking about a stock that only has a 60-month beta of 0.36 — could offer a discount for contrarians.

Going on Offense with KO Stock

Basically, the bulk of the traditional bullish case of KO stock centers on its defensive attributes — and that’s no knock on the name. When the global economy faces a crisis like it is right now, defensive plays are worth their weight in gold. However, that doesn’t necessarily mean that there’s no offensive capabilities here.

I’d like to make the argument that KO, in the near-term frame, offers juicy upside potential, especially when paired with the leverage of options.

In any given short-term holding period, KO stock statistically enjoys an upward bias. Using data going back to January 2019, a long position held in Coca-Cola shares is likely to end up in positive territory. Specifically, a 10-week hold based off the current spot price ($75.31) should see KO land between $74.50 and $78. Further, the exceedance ratio — or how likely the stock will exceed spot — clocks in at 61.2%.

In other words, you’re incentivized to buy Coca-Cola stock as a debit-side trade because you’re statistically likely to win 61 out of 100 times. However, the magnitude of these wins is limited — which is what we would expect from a reliable but boring defensive investment.

My argument, though, is that probabilistic forward distributions are not fixed in stone. Stated differently, if you were to ask me, what is the chance that KO stock would be bullish 10 weeks from now, I would not automatically say 61.2%. Yes, 61.2% is the “answer” under aggregate conditions going back to January 2019. But probabilities are also dependent on the current state of the system.

A baseball player’s batting average often changes depending on how many runners there are on-base and where they are located. The existence of these runners forces the opposing pitcher to pitch a certain way, which a strong batter can exploit. It’s the same situation with stocks.

In the last 10 weeks, KO stock has printed seven up weeks but with an overall downward slope. This highly unusual signal statistically leads to a different distribution, with one of the effects being that the exceedance ratio pops to 75%.

Taking Advantage of a Possible Opportunity

Another noticeable tendency of the aforementioned signal is the shift in distribution. Under the current behavioral state of Coca-Cola stock, we would expect KO to range between roughly $74 and $82, with probability density peaking around $78.50.

Given the observed trend, I’m liking the idea of going aggressive with the 77.50/80 bull call spread expiring June 18. Should KO stock rise through the $80 strike at expiration, the maximum profit lands at over 201%. While $80 is an ambitious target, the breakeven for this spread sits at $78.33, which is a very enticing threshold.

To be fair, the above inductive methodology isn’t foolproof. While you may see a thousand white swans, that alone doesn’t necessarily mean that all swans are white — there’s always a chance of a black swan immediately collapsing that correlative assumption. Nevertheless, induction arguably gives us the best mechanism to anticipate what might happen in the future.

With that in mind, bold speculators can take a boring idea in KO stock and potentially translate it into a sizable payday.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com