In today’s trade alert, like my last one, I want to start out by selling cash-secured puts with the intent of eventually wheeling into the position.
This will make our fifth position in the Income Wheel Portfolio. I’m still looking for a few good candidates for a Jade Lizard or two, but I remain cautious given the current market environment. Moreover, I continue to try to and create a good mix of stocks with different levels of implied volatility. KO is certainly on the more conservative side and that’s okay, particularly given the current state of the market. Remember, patience pays, and we never want to force a trade, just for the sake of trading. As always, if you have any questions, please feel free to email me at andy@cabotwealth.com.
As a brief reminder, the mechanics of the Income Wheel Strategy are simple.
- Sell Cash-Secured Puts on a stock until you are assigned shares (100 shares for every put sold)
- Sell Covered Calls on the assigned stock until the shares are called away
- Repeat the Process!
Of course, you can simply just sell puts without the need to wheel into the position. Some of you don’t want to own stock and I get it … which is why we also have an Income Trades Portfolio that is just trades, with no intent of holding stock.
As always, I want to choose highly liquid market stalwarts to sell premium against over the long term. These are typically lower-beta stocks with an average implied volatility. But I also want to focus my energies on defensive stocks that are somewhat uncorrelated to the overall market.
Coca-Cola (KO)
IV: 28.61%
IV Rank: 58.5
Expected Move (Range): The expected move (range) for the August 19, 2022, expiration cycle is from just under 59 to 66.
With KO trading for 62.75 I want to sell puts at the 57.5 put strike going out 50 days for roughly $0.70, if not higher. Of course, due to a wide variety of factors, prices may and most likely will vary slightly.
The Trade
Sell to open KO August 19, 2022, 57.5 put strike for a total of $0.70 or higher (As always, prices will vary, please adjust accordingly).
Delta of short put: 0.19
Probability of Profit: 77.88%
Probability of Touch: 42.59%
Total net credit: $0.70
Max return (cash-secured): 1.22%
Risk Management
I will be using KO as part of our Income Wheel Portfolio, so if KO closes below our put strike at expiration, we will be issued shares at the 57.5 strike and begin the process of selling calls against our newly acquired shares. Until that point, we will repeatedly sell puts on KO. Of course, any necessary trade alerts/updates will follow.