If there was ever a time to be directionally neutral on soft-drink giant Coca-Cola (KO), now might be it. Fundamentally, KO stock faces significant political risk. Due to an incoming change in presidential administration, the public health framework for the U.S. may radically change. Obviously, Coca-Cola’s namesake products aren’t exactly healthy. Therefore, a neutral play with a special options strategy called the long straddle could be appropriate.
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For clarity, over the long run, I am bullish on KO stock. Generally, the underlying company has adapted reasonably well to shifting consumer tastes. Over the past year, Coca-Cola stock gained around 7%, which isn’t spectacular. However, the company also pays a 3.11% dividend yield, which needs to be taken into account. At the same time, investors can’t ignore the brewing political headwinds.
Specifically, President-elect Donald Trump’s nomination of Robert F. Kennedy, Jr. as U.S. Secretary of Health and Human Services (HHS) poses a dark cloud over KO stock. With a potential shift in food and nutrition regulations underway, Coca-Cola can’t rely on business as usual. Fortunately, with the long straddle, investors can hope for the best but have plans for the worst.
The Simplistic Beauty of the Long Straddle Strategy
Unlike some of the other options strategies I’ve discussed in the past for TipRanks — hello, iron condor! — the long straddle strategy is beautiful because it’s so simple. Objectively, it might be the simplest of multi-leg options strategies. For a given options chain (i.e., expiration date), the trader buys a call and simultaneously buys a put of the same strike price. This way, the trader is effectively “attacking” both probabilities of moving higher or lower.
Now, let’s get the bad news out of the way. While a long straddle strategy is simple, you also pay for that simplicity. Quite literally, you are paying two full premiums for what is essentially one multi-leg transaction. Ordinarily, the breakeven price for a bought option is defined as the strike price plus the premium paid. With the long straddle, the breakeven is the strike price plus the two premiums paid for the call and put.
However, the positive is that the transaction is a limited-risk, unlimited-reward opportunity. Assuming the underlying security moves strongly enough to break above or below either breakeven threshold, one or the other option will expire worthless. Still, the idea is to ride the profitable option to wherever it goes until expiration (or until you decide to exit early). Plus, the maximum risk is defined as the total debit paid to enter the transaction.
Understanding the Backdrop for KO Stock
Admittedly, KO stock doesn’t initially stand out as an intuitive long straddle trade. That’s because the worst enemy of such a strategy is stasis. However, Coca-Cola’s equity carries a very modest 60-month beta of 0.62. This metric indicates volatility that is significantly below that of the benchmark equities index. So, why would a long straddle be considered appropriate?
For one thing, the market will price in expectations of higher volatility via greater premiums. Therefore, you must always check what the market is giving you. For example, we know that Coca-Cola will likely release its fourth-quarter earnings results on Feb. 18, 2025. Presently, the premiums for options expiring after this date are quite high, making the overall long straddle proposition less likely to succeed. However, the smaller premiums charged for options expiring prior to Feb. 18 make the strategy more feasible.
Second and more importantly, there’s a big possibility that KO stock will either break out or break down from its current consolidation pattern. At the moment, investors are digesting the implications of a second Trump term. Once the picture becomes clearer, I anticipate that KO will make a significant move in either direction. If so, a long straddle would cover both events.
Specific Strategies and Risks to Consider
With options pricing data constantly changing, it’s practically impossible to provide by-the-second ideas. That said, there are some long straddles that stand out for their relatively higher likelihood of success. The first idea is for the options chain expiring Jan. 17 of next year, specifically the 65C/65P straddle (buy the $65 call and buy the $65 put). Here, the idea is that you’re betting on a breakout move. Simultaneously, you’re buying downside protection.
Another idea is for the same strike price but for the options chain expiring one week later on Jan. 24. Again, the concept is the same: you’re looking for a big swing higher in KO stock but also buying downside protection in case the sideways consolidation pattern ends miserably. Further, the combination of the option Greeks (primarily delta and theta) for both of these straddles suggests a higher probability of success than most other competing strike prices.
However, the risk is that you’re paying a double premium. Therefore, you need to be confident that wherever KO stock moves, it will do so with conviction. Moreover, there’s always a risk that volatility could die down again after a big move, which could make you unprofitable. Therefore, you’ll need to watch your position carefully and consider pulling out early once a profitability target has been met.
Wall Street’s Take on Coca-Cola
Turning to Wall Street, KO stock has a Strong Buy consensus rating based on 12 Buys, two Holds, and zero Sell ratings. The average KO price target is $73.80, implying 17.44% upside potential.
The Takeaway: Leverage a Simple but Effective KO Stock Options Strategy
As a blue-chip giant, Coca-Cola should find its footing eventually, making it a smart, dividend-paying long-term investment. However, two things can be true at the same time. Currently, the company faces a significant political hurdle that could seriously impact the price action of KO stock. Beyond that, the market’s direction for the stock remains highly unpredictable.
Given the lack of confidence in one direction or the other, investors may choose to deploy a long straddle options strategy. This approach simply involves buying a call and a put, effectively covering two events (either a big move up or down). Of course, the gamble is that KO stock must move somewhere with conviction. If that happens, buying a long straddle now could be advantageous.
