Recently, I decided to hold our Visa (V) calls through earnings and sold our Coca-Cola (KO) calls the day before their earnings announcement. I thought I would break down why I decided to take the risk in V, and not in KO.
- The continued buying of V calls into earnings is very important in my system. The V call buying never stopped, and even became more aggressive in the days ahead of the earnings announcement. (The constant bullish activity in V was similar to the activity in Oracle (ORCL), which we also held through earnings.) In the case of KO, call buying had come to a halt and put buying was accelerating. Order flow had clearly turned bearish in KO.
- KO, which had been on a big run, received an upgrade days before earnings. The stock ripped to new highs on the morning of the upgrade, but fell to be down on the day by the close. This felt like a potential short-term top.
- In the two days leading up to KO earnings, I had noticed that, in general, companies that beat earnings were not being rewarded with significantly higher stock prices (Visa, JPMorgan, and others were prime examples). This led me to believe that KO would really have to crush earnings in order to get a big move higher.
- Because we were holding V calls that expire in June, the calls had some time until expiration, so if the stock fell hard, the calls wouldn’t lose all of their value. In contrast, our KO calls expire in May, so if the stock fell hard, the calls would get crushed.
At the end of the day, I saw no edge in holding the KO position and taking the risk, so I sold.
On the other hand, I loved the V stock and option action, so I took the risk.
In my mind, holding stock or option positions into earnings is a crapshoot. And I don’t like to take the risk unless I feel strongly about a position.
As it turned out, both V and KO finished the day virtually unchanged on earnings. However, I thought I would walk you through my thought process on why I sold and held these two positions.