Elections have consequences, former President Barack Obama once quipped. As usual, his words have aged well, though perhaps not to his liking. Ahead of confirmation hearings, one nomination — that of Robert F. Kennedy leading the Department of Health and Human Services — has several entities, including soft-drink giant Coca-Cola (KO), worried.
Long an American icon, Coca-Cola and its ilk received a harsh reality check following the results of the 2024 election. Kennedy has pledged sweeping reforms at the U.S. Food and Drug Administration (FDA), which naturally impact pharmaceutical companies. However, his broader promise to “Make America Healthy Again” should raise alarms for investors of KO stock.
Since the close of Sept. 3, Coca-Cola’s equity slipped more than 14% — a massive erosion for a staid blue-chip enterprise. Following the drop, KO stock appears to have charted a pennant formation of lower highs and higher lows. Such a pattern could easily lead to either a breakout or a breakdown.
In such circumstances, a directionally neutral options strategy may be appropriate. However, condor strategies can be intimidating for new traders given their four-leg (strike price) structure. Further, because condors necessarily involve sold options to deliver directional neutrality, a risk exists of partial assignment of parts of the condor, leading to an unexpected strategic shift.
However, there’s a much simpler way to play the volatility game and that’s with a straddle.
An Intuitive Mechanism to Leverage the Uncertainty of KO Stock
Unlike many other multi-leg options strategy, the architecture of the straddle is simple. In the case of a long straddle — where the expectation is for implied volatility (IV) to rise — for a given options chain (i.e. expiration date), you simultaneously buy a call and buy a put at the same strike price. The idea is that so long as the target security moves strongly, one of these options will be profitable.
It sounds super simple because it is. However, simple doesn’t necessarily mean easy money. Obviously, the worst thing that can happen with a long straddle is for the security to stay relatively stagnant. In that situation, both the call and the put expire worthless, leading you to absorb the maximum loss. Also, since you’re effectively paying two premiums, the breakeven threshold for both sides is extended.
Obviously, then, if you have high conviction that the target security will move in one direction or the other, it may be better to take a directional wager. The long straddle is appropriate only if you’re confident in a high magnitude of movement (such as the current political drama) but not in the direction.
Now, the benefit of the long straddle — aside from being able to play both sides of the field, so to speak — is that the risk is limited to the total debit paid to enter the trade (the premium for the call and put). However, the upside is theoretically unlimited. So, unlike a vertical spread or condor, only the risk is defined, not the reward.
Using Barchart to Find Compelling Ideas
Since every optionable security will have a long straddle strategy at its disposal, it can be difficult to find enticing opportunities amid the vast derivatives market. Fortunately, a Barchart Premier membership avails you to the most attractive ideas at any given time with the proprietary Options Screener.
One idea that popped up is Coca-Cola, specifically the KO stock options chain that expires Jan. 17, 2025. Here, the long straddle of the $62.50 strike price (buy the $62.50 call, buy the $62.50 put) creates a transaction that stands a shot of reaching either upper or lower profitability threshold. This is determined by a stochastic analysis.
First, multiply these three metrics: the KO stock price, the average IV of the options chain and the time decay adjustment (i.e. the square root of the calendar days to expiration divided by 365 days). At time of writing, the product comes out to approximately $3.68 or the unit price of expected volatility. Therefore, KO could potentially rise to $66.13 or fall to $58.77 by expiration.
Based on the ask prices of the calls and puts, the upper breakeven price for the KO long straddle is $65.40, while the lower breakeven price lands at $59.60. Should the stochastics prove accurate, this trade has a shot of being profitable — and perhaps generously so if political chaos impacts Coca-Cola.
