Pepsi (PEP) Updates – Vol Fizz to Flat

by CC November 29, 2016 2:21 pm • Trade Ideas

On November 14th we looked at Pepsi (PEP) following a sharp near term sell-off that sent near term implied vol higher. It was an interesting case where one could take advantage of that implied vol spike to better position. Here’s what we said at the time:

Short dated options prices are nearing pre-earnings levels on the sell off, possibly providing an opportunity for long holder to add yield through over-writes, or those looking to play for a rebound with a short vol strategy, or a break-down using calendars

Since the original post, PEP stock has consolidated and implied vol did indeed come in sharply:


We detailed three trade ideas depending on existing positioning or desired. Here were those ideas:

Yield Enhancement:

For those that are already long PEP, selling one Dec30th 105 call at about 70 cents (stock reference 101.30) against 100 shares could make sense to add some yield for the next 45 days.

Long Alternative:

For those looking for stock alternatives or replacement with defined risk, the the Dec 100/105/110 call fly is 1.65 and is like buying stock just above the level it’s trading now while only risking 1.65 total in case the stock is unable to hold.

Put Calendars:

The last trade idea to take advantage of the vol spike is to finance for further weakness by selling near term puts. The Dec/Jan 95 put calendar is only .60 and would do great if the stock was unable to hold the 100 level and headed towards 95 by Dec expiration. Jan also captures the next earnings.

Another version of that trade would be to sell a tighter put but closer. The Nov/Jan 100 put calendar is 2.25 right now and once the Nov 100 put expired you could roll that to December.

Let first look at the yield enhancement against existing shares. This Dec30th 105 call sale created a buywrite. The ideal situation in this position is for the stock to stabilize, and maybe even go higher, with implied vol falling. That’s exactly what happened and now with the stock 1.15 higher, those Dec30th 105 calls are worth less, originally sold at .70 they are now .40. So they have added .30 to the 1.15 in gains in the stock. That’s the ideal situation. As long as the stock is below 105 there’s no need to manage this position, if the stock starts to approach that level by year end they can be closed or even rolled.

The second trade was taking advantage of the spike in vol to target a move higher in shares with in an the money fly. The thinking here is that on a move higher the implied vol would come in and gains would be more rapid on the fly as the guts of the trade (the 2 calls short on the mid strike) decline in price. With the stock 102.45  the call fly that originally cost 1.65 is now worth about 2.10. As we get closer to December expiration this simply becomes a long Dec 100 call and should be treated as such. It’s value at expiration will be whatever the stock value is less the 100 strike (as long as the stock is between 100 and 105). For management purposes a stop at the original breakeven of 101.65 (closing at that point would still result in a small profit) on the downside is probably wise, with a 105 target on the upside at which point it makes sense to take profits.

The final trades were the bearish ones that took advantage of near term vol to finance longer dated. With the stock now higher at 102.45 the Dec/Jan 95 put calendar is worth about .40 vs the .60 originally risked. And on the Nov/Dec 100 put calendar, the original 2.25 risked is worth about 1.45 (with Nov expired). The losses are entirely due to the stock being higher but the near term sales have softened the blow. The 95 calendar probably makes sense to roll to higher strikes for those still convicted, and the 100 strike can be rolled by selling a Dec 100 put to re-establish the calendar.