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PepsiCo, Inc. (PEP): Post-Earnings Pop Catches Call Writers Off-Guard

Yesterday's call sellers might be surprised by PepsiCo, Inc.'s latest earnings report

by 7/23/2014 9:10 AM
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PepsiCo, Inc. (NYSE:PEP) options flew off the shelves yesterday, with calls and puts trading at two times and five times their respective daily averages, ahead of this morning's earnings report. Short-term speculators were active, too, as seven of the 10 most active strikes are set to expire at this Friday's close.

Along those lines, PEP's most traded option was the weekly 7/25 93-strike call, where roughly 3,900 contracts crossed the tape. According to data from the International Securities Exchange (ISE), at least a portion of these calls were sold to open, in the expectation that the shares will not topple $93 through the end of this week.

Tuesday's traders will retain the initial premium collected as their maximum potential reward, as long as PEP is sitting below the strike price at Friday's close, when the weekly options expire. However, if the stock rallies beyond that mark over the next three days, the sellers could be at risk of assignment, and theoretically unlimited losses.

Bad news for yesterday's call writers: Just minutes ago, PepsiCo, Inc. (NYSE:PEP) announced second-quarter results that topped the Street's consensus per-share profit estimate. The company also upped its full-year guidance. As a result, the equity is sitting more than 2% higher in pre-market trading at $91, from yesterday's close of $89.17.


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