Thoughts on Pepsi into Earnings

• Posted by Greg Harmon
• on July 6th, 2016

It is 90 degrees here today so even though I usually only drink water this Pepsi looks fantastic. This bottle of soda represents the past for Pepsico ($PEP) though. Today the company sells more water than soft drinks. And they sell a wide variety of snack foods too, like Doritos and Lay’s potato chips. The company is also reporting earnings before the open tomorrow morning.

Heading into the report the stock is at an all-time high price level. The chart shows a pullback in May that found support at 100 and then a march higher, interrupted briefly by the Brexit shock. Broadly the stock has traded between 90 and 100 for nearly 2 years. Since February it has remained above the 200 day SMA, a broad signal of bullishness.

Momentum indicators show bullish support as well. The RSI is in the bullish zone and the MACD is rising. Neither are anywhere near extremes. The Bollinger Bands® are opening to the upside. This allows the stock price to rise. But the price action Tuesday ahead of earnings give a pause. A possible double top in the making?

Options chains show a focus of open interest this week from 104 to 108 on the call side. The put side is heftiest at 104 and 105 with some also down to 100. The at-the-money straddle suggests options traders expect a $2.10 move by Friday. That gives a range of 103.70 to 108 as I write. July monthly options are heavily focused at the 105 Strike. These suggest little or no movement this week or next.

Trade Idea 1: Sell the July monthly 105 Straddle for a $2.70 credit.

Trade Idea 2: Buy the July/August 105 Call Calendar for $1.05.

Trade Idea 3: Buy the July 103/105/107 Call Butterfly for 75 cents.

Trade 1 looks for a draw to the large open interest at 105 next week. it is profitable on a close between 102.30 and 107.70 at expiry. Trade 2 also looks for a draw to 105 next week, and then a break of the range to the upside. Trade 3 is most profitable on a pin at 105 next Friday, but makes money on a close from 103.75 to 106.25.

Trades like these are part of the Dragonfly Capital Premium product everyday. Next week starts a new earnings season so now is the time to subscribe. You also get the Macro Review and Preview each week and 10 stock trade ideas.

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Dragonfly Capital Views Performance Through June 2016 and sign up here.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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