Option Taste Testers Approve as Option Bullish Option Activity Surges
It was near this price level in March that saw analysts come in droves to upgrade Coca-Cola Co (KO). The firms were Argus, DZ Bank, HSBC and JP Morgan with price targets from $44 to $54 and all overweight and buy recommendations. A month later, and a couple of the price targets were pretty spot on as KO has floundered over the past month.
We’re definitely in an uncertain time for earnings and many companies have withdrawn their guidance. However, according to Credit Suisse, the CFO of Coca-Cola, John Murphy, suggested in a Face Time meeting that the company expects to see a bottom in performance in the second quarter.
On Monday, the call option volume was over 70% above average and 37% of the volume occurring at the ask price and 38% in between the market. The activity was largely centered on the 21 AUG 20 $47.50 call as 12,631 contracts were traded against an open interest of 2,407. The contracts that were traded were largely bought between $1.00 to $1.10. That gives a breakeven price of $48.50 or higher by expiration.
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As the option activity pick up, the technical are still a little uncertain. The price has been consolidating since its April 9 high near $50. Since then, the price has formed a series of minor lower highs and lows. Last Friday, the price attempted to rally, but fell back on high volume. The volume continued into Monday as the price gapped on the open, but couldn’t get any traction in either direction. The increased volume the past two trading sessions is an indication that something may be about to break, and the option traders are making their bets right now.
The near-term target is $50. Option traders may want to consider buying the 17 JUL 20 45/47.5 call back ratio spread for a credit of $0.41. A back ratio involves selling one contract of the $45 strike and buying two contracts of the $47.50 strike. The trade has a max gain of $41 per contract if the price closes below $45 and unlimited upside. The intent is to close the trade two weeks before expiration or earlier if the price rallies to $50 or higher. The trade has a max loss of $209 if the price closes at $7.50 at expiration.