Options Update: PepsiCo Put Options Gain Popularity

Shares of cola giant PepsiCo
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have jumped more than 3.5% so far today, with practically no news driving the shares other than the overall buying mood on Wall Street. But while 80s pop star Lucas with the Lid Off would have us believe that “Whatever bubbles, bubbles up,” options traders are not as convinced. In fact, put options, or bets that the shares will decline, are dominating the landscape this afternoon for PEP.

Specifically, more than 6,500 PEP puts have changed hands so far, outpacing the stock’s average daily put volume by a ratio of 6.5-to-1. This spike in put activity has also placed PEP on today’s Intraday Volume Explosion List. However, it was the more than 6,200 contracts that traded at PEP’s November 55 strike that caught my eye today.

PepsiCo option volume details

The Anatomy of a PepsiCo Put Position

Diving into the options data, I noticed that nearly all of the PEP November 55 put volume traded at the ask price. Combine this data with the fact that volume at this front-month option exceeds open interest, and PEP is likely being targeted by heavy buy-to-open put activity. Running with the put-buying theme, it would appear that a trader purchased 6,000 PEP November 55 puts at 10:23 a.m. Eastern time for the ask price of $2.55. The total outlay for this position would be $1,530 — ($2.55 * 100)*6,000 = $1,530,000. For this trade to reach breakeven, PEP would need to fall about 4.9% from today’s trading range just above $55 per share before the options expire on November 21. The maximum loss on this position is limited to the initial investment of $1,530,000.

By entering this trade, the investor is indicating that he expects PEP to fall sharply during the next several weeks, reversing today’s gain of nearly 4%. That said, let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

Looking at a monthly chart of PEP, we can see that the recent market meltdown has scuttled the stock’s attempt to resume it long-term uptrend. In fact, the equity is in the process of rebounding from multi-year lows near the 51 level. However, it is this resurgence in the shares that could ruin a PEP November 55 put before the trade even gets off the ground. Specifically, the equity has reclaimed long-term support/resistance at the 55 level. Furthermore, PEP has even rallied back above long-term support at its 100-month moving average – a trendline that marked the shares’ lows from July 2002 through March 2003. Should the security continue to gain momentum from this rebound, a positive return on a PEP November 55 put becomes increasingly unlikely.

Monthly chart of PepsiCo since April 2002 with 100-month moving average

The Sentiment Drivers

Turning to PEP’s sentiment backdrop, we find a mixed bag of opinions. First, options traders are betting heavily against the security, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.98 ranks above 81% of all those taken during the past year. However, Zacks.com reports that 6 of the 10 analysts following PEP rate the shares a “buy” or better. Short sellers, meanwhile, have remained indifferent, with less than 1% of the stock’s float sold short.

Sentiment indicators for PepsiCo

The Verdict?

While there are fears of a consumer-led recession winding their way through the annals of Wall Street, I feel that PEP has a mix of products that should hold up pretty well amid this economic uncertainty. After all, Doritos, Pepsi, and Mountain Dew are staples for many college students and armchair quarterbacks. That said, we could still see weakness in the broader market over the short term, and, if you own PEP shares, a put position on the equity could offer up a nice insurance policy on your portfolio.

Personally, if I did not own PEP shares and was placing bets on the stock, I would probably be looking more closely at a December 52.50 or January 2009 50 call. Such a long position would look even better from a contrarian standpoint if investor pessimism continues to grow amid the current rally in the shares.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.