By December 1999, Ivester was out as CEO, after board members Warren Buffett and Herbert Allen told him that they have lost confidence in his leadership. If anything, next CEO Doug Daft fared even worse than Ivester. Daft, an Australian and who ran Coke’s Japanese operations, did not have a clue about culture in Atlanta. In a sort of retaliation for Ivester’s handling of Keough’s loyalists, he also made many of Ivester’s favorite executives leave company. He also looked for quick fixes – for example, by trying to boost Coca-Cola’s profitability by simply reducing headcount. By May of last year, Daft was out as CEO, and Neville Isdell – a former darling of Keough – came out of retirement to run Coca-Cola.

Described as “charismatic,” Isdell may be best man for job, but it is still too early to see what he can do at this stage to revitalize brand. Under leadership of trio of Goizueta, Keough, and Ivester in 1980s and much of 1990s, shares of Coca-Cola were a must-have and Coca-Cola was regarded as a growth stock. Please also keep in mind, however, that run of KO during that time also occurred in midst of greatest bull market in U.S. stock market history.

Again, readers should recall that I have always contended that we are still in a secular bear market – a bear market not unsimilar to 1966 to 1974 secular bear market. While indices such as Dow Industrials, Transports, S&P 400 and S&P 600 have recovered nicely since cyclical bear market bottom in October 2002, large caps such as Coca-Cola, Microsoft, or even GE have never really covered, and it is my belief that large caps will continue to underperform once bear reasserts itself sometime this year. The dividend yield of 2.6% may or may not help, but who would want to hold a “value stock” once Fed Funds rate is greater than its dividend yield (as of right now, Fed Funds rate is 2.5%)? I really do not see deep value here. While a P/E of 20 is at low end of its five-year range, it is interesting to note that Warren Buffett started buying his shares of Coca-Cola in 1988 when P/E was only 13 (with a market cap of less than $15 billion) – and analysts at time were proclaiming stock to be expensive! S&P currently projects a fair value of Coca-Cola at $46, so there is really not a great margin of safety here.

While I believe Coca-Cola is a very strong brand and should be a part of every investor’s long-term core holdings, I do not believe it is a good time to buy at this point. The growth in stock price of KO was neither due to luck nor coincidence – it was due to Goizueta’s shrewd management of stock price, Keough’s salesmanship of company, and Ivester’s financial genius – along with a roaring bull market more than anything else. Despite lack of leadership in Coca-Cola during last seven years, part of old dream of KO being a growth stock has still hung on – for far too long. For KO to be an attractive stock once again, this author will need to see a more compelling valuation, such as a stock price of $25 to $30 a share. At some point, however, I believe KO may be a glamour stock once again (as it still has a lot of potential in China and India where only a total of about 850 million cases of Coke finished products were shipped in 2004, compared to 20 billion cases for entire world), but not until some of weak hands have been shaken out from stock.

Please let us know your thoughts and opinions. Is KO a buy, hold or sell?

What about options that are closed before expiry? One could hazard a guess that most options closed near expiry would be either in-the-money, at-the-money or just out-of-the-money.

Why? In-the-money options will behave more and more like underlying deeper they are in-the-money and closer they get to expiration. Holding in-the-money options therefore will carry more risk. This could be a reason why some holders may want to close their in-the-money positions prior to expiration. Out-of-the-money options on other hand may be worth very little and hold little risk (low delta/gamma/theta/vega). Therefore you might say there is larger chance of an out-of-the-money option being held until expiration.

Therefore, 50%-60% of options that CBOE claim are closed before expiration could also be weighted towards in-the-money options. For numbers below, we will assume split is 60-40% (60% in-the-money and 40% out-of-the-money).

So then, majority of 30-40% that go on to expiry would therefore be out-of-the-money and of course would expire worthless like out-of-the-money options do. Does that mean you should be a net seller? Does that mean 70% of options “expire profitable to seller”?

Let’s play with some numbers. Let’s say we have an exchange with 1,000 open option contracts.

•First, 10% of options (all in-the-money) are exercised early leaving 400 in-the-money and 500 out-of-the-money. There are 900 options remaining. •Then 55%* or 550 of initial pool are closed out leaving 350 open contracts. (* 55% is half way between 50-60% CBOE number.) •Of these 550, we need to estimate how many are in-the-money and how many are out-of-the-money. Since we have established a weighing towards in-the-money options, let’s assume 60% of these are in-the-money and 40% are out-of-the-money. •In end, we have 350 contracts run to expiration.

Based on our calculations, that would leave 70 in-the-money options and 280 out-of-the-money options that will run until expiration. (see table). Based on one assumption above, 80% of options that will go to expiry are out-of-the-money and therefore will expire worthless.

TOTALIn-the-moneyOut-of-the-money 1000500or 50%500or 50% Early exercise (10%)1000 Remaining900400500 Closed positions (55% of 1000)550330220 Option to trade to expiry35070 or 20%280or 80%

So now figures make sense. Perhaps 80% of options that run to expiry do expire worthless. (Perhaps real figure is 70% or 90%.) However that is not same as saying 80% of ALL options expire worthless. Can you see difference? Furthermore, coming to conclusion that is it better to be a seller than a buyer from a single biased statistic like this is plain nonsense.

In a topic like that of as options trading, it is easy to get caught up with statistics, but if we take time to think and research before drawing conclusions, then surely we will become better traders.

The author, Guy Bower, is director of Options1 Trading Advisory. Options1 is an independent and licensed commodities trading advisory with clients around the world. Guy has authored two best selling books on Options and Hedging.