In early December we checked in on Pepsi stock and detailed two different ways to position bearishly with defined risk. With the stock slightly higher than entry I wanted to check in on the trades, compare results and determine courses of action for both. First, let’s look at the more aggressive position, a put spread. From Dec 5th:
PEP ($117.30) Buy March 115 / 105 Put spread for $2
-Buy to open 1 March 115 put for 2.70
-Sell to open 1 March 105 put at 70 cents
With the stock slightly higher at 118.70 this trade is a loser, worth about 1.50 versus the original 2.00 at risk. There is, however, a lot of time for this to get back in the game. But if the stock were to get above 120 and hold that would be a technical breakout and the best course of action would likely to be to cut losses. On the flipside if the stock were to fail here and approach the 115 level it’s important to keep in mind the 113 breakeven level, and how likely that becomes as time goes by and March approaches.
The other position was slightly less aggressive, looking to finance downside with the sale or nearterm premium at the same strike, a put calendar. Here was that trade idea:
PEP ($117.30) Buy Dec 29th weekly / March 115 put calendar for $2.15
-Sell to open 1 Dec 29th 115 put at 55 cents
-Buy to open 1 March 115 put for 2.70
The Dec 29th puts have expired worthless and now the position is simply the March 115 puts, worth 1.85, versus the 2.15 originally at risk. So a smaller loss, and now the optionality of rolling the expired short strike. So for trade management purposes the Dec 110 puts should be sold at .82, creating a March 115/110 put spread for 1.33. In hindsight, this was the better trade as it has less of a loss with the stock higher and is now less overall money at risk as well. What was sacrificed on the calendar was if the stock made a move lower in December, as it would have been less profitable than the outright put spread. In the case of a stock moving sideways or slightly against a position directionally, the calendar will outperform the vertical spread. It also offers a few different ways to skin a cat depending on what happens in the near term.