PEP Analysis

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

[PEP in Wikipedia]

PEP

I shall use the NOV series of options, which trades for the last time 46 days hence, on Nov. 20.

Ranges

Click on chart to enlarge.

PEP at 10:20 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 21%, which is identical to the VIX, a measure of volatility of the S&P 500 index. PEP’s volatility stands in the 54th percentile of its annual range.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart	Earns
Upper	102.33	109.33	100.42	97.39
Lower	88.33	81.33	89.99	93.27
Gain/loss	7.3%	14.7%

Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move
The Trade

Iron condor, short the $100 calls and long the $105 calls,
short the $87.50 puts and long the $85 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
Upper	100	82.3%
Lower	87.5	83.6%

The premium is $0.68, which is 21% of the width of the position’s wings. The stock at the time of analysis was priced at $95.17.

The risk/reward ratio is 6.4:1.

The zone of profit in the proposed trade covers a $6.25 move either way. The biggest immediate move after each of the past four earnings announcements was $2.06, and the average was $1.28.

Decision for My Account

I am not taking this trade, for several reasons.

Open interest on the options grid lessened since I first looked at PEP last week. As a result, only two out of the money call strikes have the triple-digit or better open interest that I prefer.

Implied volatility has fallen so that it stands well below the 60th percentile of its 12-month range, a bit low for my taste although not excessively so.

The risk reward ratio, at 6:1,  is beyond the bounds of what I will accept in a trade. Normally, I won't take anything greater than 4:1. That's a lot of risk for a fairly low premium of 68 cents.

The premium itself is 21% the width of the wings; I'm happiest at 33% although I regularly accept 25%. The premium is a bit low by this measure, as well.

All in all, better to keep the funds I would use in this trade in reserve for better opportunities.

-- Tim Bovee, Portland, Oregon, Oct. 5, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

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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Based on a work at www.timbovee.com.