As one of the larger companies of the consumer discretionary sector, The Coca-Cola Company (KO) shares have enjoyed a relative upward trend since the beginning of 2022 as investors appear to be bracing for potential interest rate hikes. Coca-Cola shares currently trade in an above average range based on historical volatility, and option traders appear to be positioned for the stock to rise after the company reports earnings for the fiscal fourth quarter. Analysts expect the company to announce $0.41 in earnings per share (EPS) and $8.93 billion in revenue.
Investors will be paying keen attention to how Coca-Cola has managed to navigate ongoing supply chain issues and how rising costs could affect the bottom line. Insiders have recently increased the amount of shares being sold, unloading over 314,000 shares valued at close to $18.6 million over the past 90 days. Investors will be keeping an eye on if the beverage maker can continue to increase sales volume and what, if any, impact may be had on the company's dividend.
Consider that the open interest for Coca-Cola features a relatively low number of call options compared to its 52-week average. However, even this low amount of calls outnumbers the number of puts in the open interest. There are a large number of multi-legged option strategies that lend themselves to Coca-Cola stock providing outsized gains after earnings than current option pricing is predicting.
- Traders and investors have bid up the Coca-Cola share price ahead of earnings.
- The Coca-Cola share price recently rose above its 20-day moving average, establishing a new 52-week high.
- Coca-Cola has performed near the top of a sector that has outperformed the rest of the market as a whole.
- The volatility-based support and resistance levels allow for a stronger move to the downside.
- There has been an intriguing amount of multi-legged option trades that lend themselves to Coca-Cola shares rising after reporting earnings.
Recent Consumer Staples Sector Performance
Coca-Cola is a top three holding of State Street's Consumer Staples Sector ETF (XLP) by weight. The sector has recently outperformed the market at large. XLP has shed 1% year to date, while State Street's S&P 500 Index ETF (SPY) has fallen 5.6% in the same time frame. The chart below illustrates the recent performance of Coca-Cola compared to XLP and nine of the top sectors of the S&P 500.
It's notable on this chart that, despite the recent small upturn from a wider January sell-off, sector rotation appears to show that investors are positioning themselves to be prepared for the Federal Reserve to increase interest rates to combat inflation. The top performing sectors—energy (XLE), consumer staples, and financials (XLF)—are considered relatively "safer" bets during times of rising inflation and interest rates.
Nearly all of these sectors reflect "necessities" and are considered sectors where consumers will focus their spending power in inflationary environments. It's notable that, in this time period, Coca-Cola stock itself outperformed each sector with the exception of XLE, which has gained a staggering 19.3% since the start of 2022.
Inside the Consumer Staples Sector
The consumer staples sector focuses on essential products used by consumers. This category includes things like foods and beverages, household goods, and hygiene products as well as alcohol and tobacco. These goods are those products that people are unable—or unwilling—to cut out of their budgets regardless of their financial situation.
It's because this sector is composed of "essential" goods for consumers that the consumer staples sector is considered a relatively "safer" bet during times of inflation. Shares of companies in this sector tend to decline far less during bear markets than stocks in other sectors. Investors target stocks in this sector because of high dividend yields, the companies' slow and steady nature, and low volatility.
The chart below compares the recent performance of Coca-Cola stock with the top holdings of State Street's Consumer Staples Sector ETF (XLP).
This chart helps to highlight how stocks in this sector have enjoyed relatively positive or flat performance since the start of 2022, with a few exceptions—notably Costco Wholesale Corporation (COST) and The Estée Lauder Companies Inc. (EL). Coca-Cola has outperformed every stock in the sector with the exception of tobacco companies Phillip Morris International Inc. (PM) and Altria Group, Inc. (MO).
Price Action and Option Activity
An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Coca-Cola stock. The chart below depicts the recent price action for the KO share price as of Tuesday, Feb. 8.
This chart highlights how the Coca-Cola share price has maintained a near constant upward trend since its dividend date in early December, marked with the small "D" on the bottom axis of the chart. Coca-Cola shares pulled back slightly in late December, falling below the 20-day moving average. The stock has since risen above this level in the weeks before earnings, having recently touched a new 52-week high.
The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for Coca-Cola stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.
The average true range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.
It's notable that these bands narrowed as Coca-Cola traded at the extreme high of the volatility range but have since begun to widen as earnings approaches. This could mean that there is greater uncertainty toward the Coca-Cola share price in the near term.
Recent option trading volumes for Coca-Cola favor calls over puts at a nearly 3-to-1 ratio. In addition, the open interest features 378,000 calls compared to 298,000 puts. Both of these figures reflect a bullish outlook toward Coca-Cola stock; however, further analysis is required.
For Feb. 11, the next weekly option expiration date, the single option with the highest open interest is the $62 call, with 8,000. This is an at-the-money option, as the Coca-Cola share price recently rose to this level ahead of earnings.
For Feb. 18, the next monthly option expiration date, the single option with the highest open interest is the $60 call with 44,000. This is currently an in-the-money option. However, it should be noted that the $60 put has an open interest of 23,000. An analysis of prior option trading volumes indicates that there could be a significant number of straddles at the $60 strike.
On Jan. 18, a trader opened 15,000 straddles at the $60 strike expiring Feb. 18. The total cost for this position is $2.80 per contract, or $280. If long on this straddle, the position would be profitable if Coca-Cola stock moved 4% on earnings. The current implied move for Coca-Cola stock on earnings is 2.9%. That means that a trader is placing a $4.2 million bet that Coca-Cola stock will move more than current option pricing is projecting.
The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.
The Coca-Cola share price has trended upwards since going ex-dividend at the beginning of December. Coca-Cola shares recently reached a new 52-week high in the days before earnings, as the company has benefited from inflation-based sector rotation. Option traders appear to be buying large amounts of call options ahead of earnings, implying a bullish sentiment. If these bets were to unwind, it could place unexpected downward pressure on the Coca-Cola share price.