Why One Big Trader is Taking a Sip of PepsiCo
GUEST BLOG: Brian Stutland, President of Stutland Equities and a contributor to CNBC's "Options Action."
Yesterday, fiscal cliff worries were at the forefront of traders' minds, and that sent the S&P 500 down 0.5% on the day. Should the U.S. go off the "cliff," there is a high probability of a recession in the near future.
This has option traders who were looking to make bullish bets ahead of the New Year opt for defensive names or consumer staples. Yesterday, in PepsiCo, a trader sold 1,760 January 67.5-strike PEP puts for $0.45.
This is a bullish trade that will profit if PEP is above $67.05 at January expiration in 45 days. Given that the stock was at $70.24, this trade makes money so long as PepsiCo avoids a 4.5% downward move.
Option traders sell puts on a stock when they know they would be willing to own shares at the given price.
(Read More: PepsiCo's Profit Dips Amid Turnaround Push)
In trading terms, that price would be the strike price. If the stock appreciates and is above the strike at expiration, the trader is able to book profits from the premium collected by the put sale. If the stock is belowthe strike, then the trader is "put" the stock, and now has a long position at a level where the trader is comfortable buying in.
In this case, the trader has announced a willingness to buy PEP for an effective price of $67.05, and will collect an annualized 3.7% in option premium while patiently waiting for that entry price.
Looking at PepsiCo's chart, the 67 level looks to be a strong area of support. It is below the stock's November's low, and coincides with the area of resistance that the stock broke through last April.
Pepsi, along with typical defensive plays like the other consumer staples and utilities, is likely to weather any "Fiscal-Cliff"-induced recession better than most stocks.
(Read More: Coke, Pepsi Join War on Obesity: 'Calories Count')
PepsiCo owns a valuable portfolio of brands, including everything from Pepsi and Mountain Dew to Frito Lay, Quaker, Gatorade, and Tropicana. The company has recently been focused on expanding its range of non-carbonated juices and sport drinks, and hopes to grow its Global Nutrition division by 230% between now and 2020.
Whether the U.S. jumps off the "Fiscal Cliff" or not, consumers are still going to buy soda and potato chips, and this makes PepsiCo a good defensive buy. By selling a put, this trader is being paid to wait for a good entry point, instead of chasing the stock higher and buying at a poor valuation.
At $67.05, PepsiCo will yield 3.2% in dividends. More importantly, this company has strong growth prospects ahead, no matter what the economy does. If the U.S. is in recession next year, this is one of the companies that you will want exposure to.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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