Here is a summary of what I will be discussing tonight on Options Action on CNBC at 5:30pm:
We’ve expressed our dislike for the consumer staples sector on numerous occasions in the past 3 months. Enis wrote about the expensive valuations most recently about a month ago in his Macro Wrap post. Technically, the sector has finally broken its longstanding uptrend, so both the technicals and fundamentals finally aligned.
PepsiCo is a classic example. This is a 19 P/E company with a 7% projected earnings growth rate that only pays a 2.9% dividend (so even the yield argument is not that compelling). Considering that it has not grown earnings at more than 11% at any point in the last 5 years, seems like a set up of quite limited upside, and plenty of downside.
The technical picture is ugly. PEP broke its 50 day moving average for the first time in 2013:
Since the break comes after such a steep uptrend, it has even more importance. The 200 day moving average is the obvious target for the stock now, and it’s all the way down below 75.
So the entry here is decent, only a couple percent below the 50 day ma, and with a well defined downside target. Most importantly, the tone in the market has clearly changed. Rallies are being sold as opposed to dips being bought. PEP’s rallying today, and we’re selling it.
New Trade: PEP ($79.88) Bought July 80 / 75 Put Spread for 1.20
-Buy 1 July 80 Put for 1.50
-Sell 1 July 75 Put at .30
Break-Even on July Expiration:
-Profits of up to 3.80 btwn 78.80 and 75, max gain of 3.80 below 75
-Losses of up to 1.20 btwn 78.80 and 80, with max loss of 1.20 above 80.
Payout Diagram:
