The fizz is about to come out of Pepsi (NYSE:PEP) stock. PEP stock is up an impressive 13% off its May lows, but it has come too far, too fast. And next week’s earnings report will do little to reinvigorate worn-out Pepsi bulls.

Let’s start with PEP stock’s price action. The shares have enjoyed a solid rebound from support near $95 over the past two months. PEP not only reclaimed the psychologically important $100 level, but also retook its 50-day moving average.

However, this rally is losing steam quickly. The shares have stalled just shy of $110, an area of long-term technical resistance. Additionally, PEP stock’s 200-day moving average is in the area, creating additional headwinds.

And if that wasn’t enough, PEP stock is trading firmly in overbought territory. Specifically, it’s 14-day relative strength index (RSI) has bounced around 70 for the past month. In other words, PEP stock is overbought and due for a pullback.

Next up, PEP earnings are slated to hit Wall Street on Tuesday next week. Currently, analysts are expecting a second-quarter profit of $1.52-per-share, up from $1.50-per-share a year ago. Revenue, meanwhile, is forecast to rise a mere 2.4% year-over-year to $16.08 billion.

Sentiment ahead of the event is a mixed bag. Among analysts, Thomson/First Call reports that 12 of the 22 analysts following PEP stock rate it a “buy” or better.  The 12-month consensus price target of $114 represents only a minor premium to Tuesday’s close. This situation lends itself to “hold” downgrades, especially with nothing exciting expected out of PEP’s earnings report.

Options traders, however, appear to be quite optimistic. PEP’s July put/call open interest ratio currently rests at a lowly reading of 0.58, with calls nearly doubling puts for the series.

That said, these call traders may have ulterior motives. During the most recent reporting period, the number of PEP shares sold short surged by 41%. Roughly 12.4 million shares of PEP stock are now sold short, less than 1% of the stock’s total float.

While this short position doesn’t represent any threat of a short-squeeze situation, it does undermine the bullish options sentiment reading. This is because short sellers often buy calls to hedge their positions.

Overall, July implieds are projecting a modest post-earnings move of about 3.9% for PEP stock. The upper bound for this potential move lies at $112, while the lower bound lies at $104.

Trades for PEP Stock

Bear Put Spread: PEP stock’s May/June rally is dead. The shares have made no headway at overcoming overhead resistance, and they remain overbought. A drop is coming, and earnings could be the catalyst. Those looking for a bearish options trade on PEP stock ahead of earnings might want to consider a July $104/$105 bear put spread.

At last check, this spread was offered at 18 cents, or $18-per-pair of contracts. Breakeven rests at $104.82, while a maximum profit of 82 cents, or $82-per-pair of contracts, is possible if PEP stock closes at or below $104 when July options expire.

Put Sell: Alternately, if you think the shares will remain stagnant for the time being, then a July $103 put sell has a high probability of finishing out of the money.

At last check, this option was bid at 45 cents, or $45-per-contract. As usual with a put sell, you keep the premium as long as PEP stock closes above $103 when weekly July options expire at the end of next week. On the downside, if PEP trades below $103 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $103-per-share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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