The Coca-Cola Co (NYSE:KO) is overdue for a short-term plunge, according to a historically reliable options indicator that shows an overabundance of bullish activity on the stock.
That’s the message from the venerable options experts at McMillan Analysis Corp., who today write that that their computer generated dollar weighted Put-Call Ratio Sell Signal has been visually confirmed by KO’s chart:
As you can see above, as KO’s price has risen a bit over the past couple of months, its dollar-weighted put-call ratio has plunged during the period, reaching its lowest levels since late June of 2016. This means that bullish options bets on a dollar basis (puts) are dwarfing those on the bearish side (calls).
This sort of imbalance between bulls and bears typically ends with a sharp turn in the other direction, and as the crowded trade unwinds, KO’s price could see a steep short-term decline.
If you’d like to know more about put-call ratios, here’s McMillan’s explanation:
Put-call ratios are useful, sentiment-based, indicators. The put-call ratio is simply the volume of all puts that traded on a given day divided by the volume of calls that traded on that day. The ratio can be calculated for an individual stock, index, or futures underlying contract, or can be aggregated – for example, we often refer to the equity-only put-call ratio, which is the sum of all equity put options divided by all equity call options on any given day. Once the ratios are calculated, a moving average is generally used to smooth them out. We prefer the 21-day moving average for that purpose, although it is certainly acceptable to use moving averages of other lengths.
It’s important to note that a stock’s put-call ratio isn’t a perfect indicator. However, it is an important tool to help identify stocks that are due for short-term corrections. It pays to closely monitor KO’s share price closely for signs of a correction over the following several days as a result.
The Coca-Cola Co shares were trading at $45.07 per share on Thursday morning, down $0.25 (-0.55%). Year-to-date, KO has gained 10.57%, versus a 9.10% rise in the benchmark S&P 500 index during the same period.
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