Update – Pepsi (PEP) Fizz

by CC July 11, 2017 12:38 pm • Trade Updates

Yesterday we previewed Pepsi (PEP) earnings (that came out this morning) and detailed two trade ideas, one as a stock alternative the other as a hedge for longs. With the stock down a bit let’s check in on those. First, the stock alt:

PEP ($115) Buy the July14th weekly 115/118/121 call fly for .70
  • Buy 1 July14th 115 call for 1.30
  • Sell 2 July14th 118 calls at .35 (.70 total)
  • Buy 1 July14th 121 call for .10

With the stock 113.80 this fly is worth about .25 vs the .70 initially paid. As far as trade management it will be worthless with the stock below 115 and needs to get back to 115.70 to breakeven. That’s not impossible but it only has a few days to do so. The disciplined move is to take the loss and look for more time. Right now the August 4th 115/118/121 call fly is about .55. A roll would cost about .30 to .35 making total risk about 1 with the chance to still make 2.00 if the stock goes to 118 by August. That makes more sense than hoping the stock bounces in the next few days.

Now to the hedge, here it was:

vs 100 shares of PEP ($115) Buy the Sept 110/100 put spread for .85
  • Buy 1 Sept 110 put for 1.35
  • Sell 1 Sept 100 put at .50

With the stock lower this is about unchanged and won’t really come into effect until unless the stock threatens 110. For long holders it makes sense to keep this on. If the stock were to continue lower it’s a good spot for protection and if the stock goes higher it can be taken off later for a loss against gains in the stock.