KO: Investors Flock to Safety Trade

Dear Reader,

On Friday, we looked at a Daily Price Chart of the Vanguard Total Bond Market ETF, noting that BND’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.

For today’s Trade of the Day we will be looking at a Keltner Channel chart for Coca Cola Co. stock symbol: KO.

Before breaking down KO’s daily Keltner Channel chart let’s first review which products and services are offered by the company.

The Coca-Cola Company’s strong brand equity, marketing, research and innovation help it to garner a major market share in the non-alcoholic beverage industry. The company is making investments in healthier alternatives like coffee, sparkling water and sports drinks.

Now, let’s begin to break down the Keltner Channel chart for KO. Below is a Daily Price Chart and the three Keltner Channels for KO stock.

Buy KO Stock

The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether a stock is overbought or oversold. If a stock’s daily stock price is trading above the upper Keltner Channel, this signals that the stock is temporarily overbought and subject to a retracement.

Even stocks that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When a stock becomes overbought, it’s price will typically decline soon after as the inevitable profit taking occurs.

The KO daily price chart shows that the stock is in a strong price uptrend and has become overbought several times. You can see this as KO has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when KO became overbought, the stock soon experienced a pullback.

Finding opportunities when a stock experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.

The Keltner Channel “Buy Zone” occurs when a stock is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the stock is likely to rally.

Our initial price target for KO stock is 70.00 per share.

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86.2% Profit Potential for KO Option

Now, since KO stock is currently trading below the upper Keltner Channel, this offers a strong trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for a KO call option purchase.

The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat KO price to a 12.5% increase.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following KO option example, we used the 1% Rule to select the KO option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.

Trade with Higher Accuracy

When you use the 1% Rule to select a KO in-the-money option strike price, KO stock only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if KO stock is flat at 67.98 at option expiration, it will only result in a 5.7% loss for the KO option compared to a 100% loss for an at-the-money or out-of-the-money call option.

Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.

The goal of this example is to demonstrate the powerful profit potential available from trading options compared to stocks.

The prices and returns represented below were calculated based on the current stock and option pricing for KO on 8/5/2024 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.

For this specific call option, the calculator analysis below reveals if KO stock increases 5.0% at option expiration to 71.38 (circled), the call option would make 40.3% before commission.

If KO stock increases 10.0% at option expiration to 74.78 (circled), the call option would make 86.2% before commission and outperform the stock return nearly 9 to 1*.

The leverage provided by call options allows you to maximize potential returns on bullish stocks.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

Check out Chuck’s High-Accuracy Micro Trades

Earlier today, I went live to discuss my exciting high-powered ‘Micro Trades’. These Micro Trades give you the opportunity to profit in all different sorts of markets and take advantage of volatility.

If you weren’t able to attend my live session today, you’re in luck. We recorded the session so that YOU still have the opportunity to watch.

Click HERE to watch the replay so you don’t miss out on this exciting strategy!

Wishing You the Best in Investing Success,