Options Bulls Score Big on PepsiCo Rally

A revenue beat and post-earnings price-target hikes helped put the wind at PEP's back

by Lillian Currens

Published on May 16, 2019 at 3:59 PM

Subscribers to Schaeffer's Weekend Trader Series newsletter just doubled their money with our PepsiCo, Inc. (NASDAQ:PEP) July 120 call option recommendation. Below, we'll explain how this short-term options trade hit its 100% target during a period of time where the soda stock rose just over 6% on the charts.   

When we initially recommended the call in our April 7 email to subscribers, PEP stock had just touched a record high of $123.19 on March 27. Former resistance in the $120-$122 neighborhood -- which also marks a 10% year-to-date gain -- then stepped up to provide support on a pullback, creating an appealing technical entry point for a bullish play (particularly given PEP's tendency to outperform in the April-July period).

The sentiment backdrop also supported a call trade. A 48% spike in short interest since February created room for short-covering tailwinds to lift the stock. Plus, nearly 60% of covering analysts had given PEP a tepid “hold” opinion at the time, leaving the door wide open for future upgrades to lure more buyers to the table.

And among options traders, the equity had racked up a 10-day put/call volume ratio of 1.19, in the 94th percentile of its annual range -- pointing to a healthier-than-usual appetite for long puts over calls over those past two weeks.

Finally, our recommended call had a leverage ratio of 15.1, meaning it would only take a 6.7% jump in PEP shares for the option to achieve its target profit of 100%. In other words, the options trade provided substantial leverage over a comparable stock trade.

PEP initially stayed quiet after our early April recommendation, but the stock took flight on April 17 after a first-quarter revenue beat caught pessimistic traders and analysts by surprise. At least seven brokerage firms lifted their PepsiCo price targets after that well-received report, and Wells Fargo hiked its target for a second time in mid-May.

This bullish upswing in analyst sentiment coincided with a mass exodus by the shorts. During the two-week period ended May 1, short interest on PEP dropped by 10.2% as the stock ran to a string of new highs.

This combination of a positive fundamental driver, coupled with Pepsi stock's strong price action and its sentiment backdrop of unwinding pessimism, created the perfect setup for our subscribers to achieve 100% profits on their PEP July 120 calls on Wednesday, May 15 -- less than six weeks from the initial recommendation date.  

PEP May 16

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