Markets are looking very bullish these days with many tech stocks on fire. However, some more risk averse investors might be interested in more defensive, high yield plays.

Coca-Cola Company (KO) provides defensive exposure and an above average yield of 3.08%. 

Using options, we can generate an additional income from high yielding stocks via a covered call strategy.

KO Covered Call Example

Let’s look at two different covered call examples on KO stock. The first will use the February expiration and the second will use a seven-month expiration.

Let’s evaluate the first KO covered call example. 

Buying 100 shares of KO would cost around $5,950. The February 16, $60 strike call option was trading yesterday around $0.85, generating $85 in premium per contract for covered call sellers. 

Selling the call option generates an income of 1.45% in 25 days, equalling around 21% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of $60?

If KO closes above $60 on the expiration date, the shares will be called away at $60, leaving the trader with a total profit of $135 (gain on the shares plus the $85 option premium received). That equates to a 2.30% return, which is 33.61% on an annualized basis. 

Instead of the February 16 call, let’s look at selling the August $60 call instead. 

Selling the August $60 call option for $2.60 generates an income of 4.57% in 207 days, equalling around 8.06% annualized. 

If KO closes above $60 on the expiration date, the shares will be called away at $60, leaving the trader with a total profit of $310 (gain on the shares plus the $260 option premium received).

That equates to a 5.45% return, which is 9.61% on an annualized basis.

Of course, the risk with the trade is that the KO might drop, which could wipe out any gains made from selling the call.

Also, any gains above $60 are foregone.

Barchart Technical Opinion

The Barchart Technical Opinion rating is a 40% Buy with a weakening short term outlook on maintaining the current direction.

Implied volatility is at 14.88% compared to a 12-month low of 11.19% and a 12-month high of 24.76%.

The next earnings release is set for February 13th.

The current analysts ratings are shown below:

Company Description

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. 

The roll out of Coca-Cola Energy, Coca-Cola Plus Coffee, Powerade Ultra and Powerade Power Water are some additions on these lines. 

The company's portfolio includes beverage products, spanning from sodas to energy drinks. 

In addition to its sparkling soft drinks, the company sells a large range of still beverages including water, enhanced water, juices and juice drinks, sports drinks, ready-to-drink teas, coffees and dairy and energy drinks. 

Most of the company's beverages are manufactured, sold and distributed by independent bottling partners. 

Coca-Cola currently reports operating results under the following segments - Europe, Middle East and Africa; Latin America; North America; Asia Pacific; Global Ventures; Bottling Investments and Corporate.

Covered calls can be a great way to generate some extra income from your core portfolio holdings.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

• Stock Indices Post Record Highs on U.S. Economic Resilience
• This Stock Is Leading the AI Chip Rally
• Should You Buy the Pullback in Starbucks Stock?
• Coursera (COUR) Bulls Remain Undeterred with Goldman Sachs’ Downgrade