The next round of quarterly corporate earnings reports kicks off this week, and PepsiCo (PEP) is among the scant few early reports hitting Wall Street. The company has long been a staple among buy-and-hold traders due to its long history of dividend growth — PepsiCo has raised steadily raised dividends for the past 43 years.
But earnings reports can also provide enough volatility to make trading PEP options a worthwhile addition to your portfolio.
Digging into the numbers, Wall Street is looking for fiscal second-quarter earnings of $1.24 per share from PEP stock, a figure that is down 6.4% from year-ago levels. Revenue, meanwhile, is seen slipping 6.5% to $15.8 billion. Still, PepsiCo earnings have topped Wall Street’s estimates in every quarter for the past four years, and, with a fresh NBA deal following a stellar finals, the company shows little signs of disappointing this time around.
It should come as no surprise, then, that many analysts have set their sights higher than the consensus. According to EarningsWhisper.com, the whisper number for PepsiCo’s second-quarter report arrives at $1.27 per share, 3 cents better than Wall Street’s average.
This bullish bias toward PEP stock carries over into the brokerage community. Currently, Thomson/First Call reports that 16 of the 25 analysts following PEP stock rate it a “buy” or better. That said, there is more room on the bullish bandwagon, as the 12-month consensus price target of $108 represents a minor premium of only 14.4% to yesterday’s close.
Click to Enlarge Options traders, meanwhile, are not as enthusiastic. In fact, the July/August put/call open interest ratio of 0.97 suggests a high degree of skepticism from this speculative crowd, with puts nearly in parity with calls among options set to expire within the next two months. Furthermore, the weekly July 10 series put/call open interest ratio slips only slightly to 0.93, hinting at a degree of pessimism from options traders focused heavily on this week’s quarterly report.
Overall, weekly July 10 series implieds aren’t projecting much of a post-earnings move for PEP — only about 2.2%. The upper bound for this potential move lies at $96.63, while the lower bound lies at $92.37. Technically, PEP is facing overhead resistance at $95, as well as its 50- and 200-day moving averages. Support, meanwhile, lies in the $92-$93 region.
2 Trades for PEP Stock
Put Spread: With an earnings beat likely already priced into the shares, PepsiCo will have to do much more to provide the kind of “wow” factor needed for a post-earnings rally. As such, the path of least resistance for PEP stock remains to the downside over the short term. Traders looking to jump on the bearish bandwagon in the options pits might want to consider a Jul $93/$94.50 bear put spread.
At last check, this spread was offered at 52 cents, or $52 per pair of contracts. Breakeven lies at $94.05, while a maximum profit of 98 cents, or $98 per pair of contracts, is possible if PEP stock closes at or below $93 when July options expire.
Married Put: Options are not for speculation alone, however. By using a strategy called a “married put,” stock traders can utilize PEP options as sort of an insurance policy when opening up a new position.
Simply put, a married put involves purchasing one front-month at-the-money or out-of-the-money PEP put for every 100 PEP shares purchased. The strike of the purchased put should reflect your risk tolerance – i.e., an at-the-money Aug $95 put offers full protection, with losses limited to the cost of the put and brokerage fees, while an out-of-the-money Aug $92 put would allow for PEP stock to test key support before the insurance kicked in.
With implies setting the low end of a post-earnings PEP move at just above $92, a PEP July $92 married put may be the way to go. In this trade you would buy 100 PEP shares (currently trading for roughly $95 per share) while simultaneously purchasing one Jul $92 put, which, at at last check was was asked for 30 cents, or $30 per contract.
In the end, the total cost for your option position would be $30, while the stock position would total $9,500 excluding brokerage fees. If PEP closes below $92 per share when July options expire, you would be able to exit the position and avoid any additional losses by exercising the Jul $92 put. Finally, if PEP holds above $92 through July expiration, you can roll the $92 put forward into August if you feel you still need the protection.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
