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Bears Swoop In On Coca-Cola (KO) Earnings Miss

Short-term KO February 37.50 put sees 14,000 contracts

by 2/13/2013 9:54 AM
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A disappointing earnings result from The Coca-Cola Company (NYSE:KO - 37.56) Tuesday set off a barrage of options trading, with overall volume exceeding three times the normal levels. Puts also traded at triple the usual rates, with more than 38,000 contracts changing hands yesterday.

By far the most active option of the day was the short-term February 37.50 put, which saw 14,663 contracts cross the tape. A healthy portion of these went off at the ask price and volume exceeded open interest on this front-month option, indicating the creation of at least some new positions. In fact, open interest rose by nearly 8,200 contracts overnight, and data from the International Securities Exchange (ISE) points to some buy-to-open orders.

The puts traded for a volume-weighted average price (VWAP) of $0.15, meaning KO shares need to close at $37.35 (strike less VWAP) on Friday (this month's expiration date) for the options to break even. This is a drop of 21 cents (just over 0.5%) from its current position. If the shares fail to breach the 37.50 strike, all the traders would lose is the premium paid.

This bearish approach to one of the steadiest members of the Dow Jones Industrial Average (DJI) is relatively new. According to data from the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio stands at 1.83, meaning traders have been buying to open nearly two calls for every put recently. In addition, that ranking is in the 75th percentile of other readings taken in the last 12 months, meaning option traders are relatively more call-heavy than in the past.

As noted, KO turned in a disappointing earnings result Tuesday, declaring that foreign exchange rates cost the company 1% of its revenue in 2012 and could cost the company another 4% in the first quarter of 2013 and up to 1% for the entire year. The stock shed 2.7% yesterday alone, but is still up nearly 4% on the year and more than 9% as compared to this same time last year. Still, the results led at least one analyst -- S&P Capital -- to cut its price target by $1 to $43. Overall, analysts' average 12-month target price is $42.15.


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