GO
Loading...

Playing the Coke Pop: Stutland

Getty Images

Shares of Coca-Cola jumped 5 percent higher on Tuesday, after the company reported better-than-expected earnings and revenue, plus a 4 percent increase in sales volume. Additionally, Coca-Cola announced that they have agreed to create a franchise bottling system with five bottling companies.

(Read More: Coca-Cola Beats Estimates, Boosted by Emerging Market Sales)

The stock has seen heavy option trading as a result of its big pop, with the biggest trade of the day being the sale of 5,000 August 44-strike calls for $0.58.

By selling this call, the trader is expressing a belief that the stock will not be above $44.58 come August expiration—and if it does, he is willing to either get short the stock or, if he happens to be long, take profit on his stock position. If this was done against stock, it would create a covered call position for the trader.

This is a way to play the seasonal "sell in May and go away" trade without actually going away. Instead of selling stock positions outright, you can sell call options against those stocks to create a downside cushion that will help your portfolio outperform if we see the typical summer weakness reemerge.

That said, if there is a summer selloff, then defensive consumer stocks like Coca-Cola should actually hold up relatively well. If this stock is at or above $44 at August expiration, then this trader will have to sell his stock there, and book his profits. This would then make a for a clean transition into a higher-beta name to play a fall rally.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."

Disclosures: None

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Latest Video

Options Action Daily Reports

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.

You Make the Call

  • Mike Khouw, Options Action trader, shares his view on News Corp stock on the heels of testimony from Rupert Murdoch before British Parliament.

  • Do you have a question for the Options Action team? Options Action selects a viewer's question and gives the answer on the show's Make The Call Web Extra video.