Wednesday, July 8, 2015

PEP Earnings

Update 8/19/2015: I exited PEP as the position neared expiration.

Shares rose by 2.9% over 42 days, or a +25% annual rate. The options produced a 1,177.8% yield on debit for a +10.235% annual rate.

The food and beverage company PepsiCo Inc. (PEP), headquartered in Purchase, New York, publishes earnings on July 9 before the opening bell.

[PEP in Wikipedia]



Click on chart to enlarge.
PEP at 10:45 a.m. New York time, 30 days hourly bars
Implied volatility stands at 18.2%, which is about the same as the VIX, a measure of volatility of the S&P 500 index. PEP’s volatility stands in the top percentile of its most recent rise.

The price broke above the prior $95.99 resistance level this morning, pushing resistance up by 67 cents.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, average earns move

The Trade

I shall use the AUG monthly series of options, which trades for the last time !0 days hence, on Aug. 21.

Strangle, short the $100 calls and long the $90 puts,
sold for a credit and expiring Aug. 22
Probability of expiring out-of-the-money


A position on PEP is hard to construct because the gap between strikes is $5, while the price isn't all that high. It's at the low end of the $5 strike spread symbols.

The premium is $1.17. The stock at the time of purchase was priced at $96.09.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $2.09, and the average was $1.55.

In constructing the position, I my first priority has been to place the earnings range within the zone of profit while pushing the premium above $1. The cost of achieving that end is that $2.09 at the top of the one standard deviation range is unprofitable

Decision for My Account

I have opened a position in PEP as described above.

-- Tim Bovee, Portland, Oregon, July 8, 2015


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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