Raptors,

We just passed expiry Friday so it is time to roll the diagonal call on PEP.  Remember we have a cost basis in PEP of 17.47.  This gives us quite a lot of leverage to upside growth.  It also lets us write out of the money calls with a leveraged return.  On tap is PEP150515C00105000 which we are going to sell for .13 a contract.  If we were doing a conventional buy/write strategy the return would be pitiful against the current price of 96.90.  But against a cost basis of 17.47 our annualized return is 8.93%.  That is an outsized return for such a large and stable company (and let’s not forget we retain over 5 to 1 leverage on share price appreciation).

Since Pepsico is both in the habit of raising its dividend and buying back stock, we can expect share price appreciation even without growth in sales.  But let’s look at sales growth anyway over the last report trailing four quarters:

Period3/146/149/1412/14
sales (millions)12,62316,89417,21819,948
growth33.8%1.9%15.9%

Sales growth is actually quite robust! Gross margins run over 50% so raptors can expect to do quite well on their shares of PEP.

Devour your prey raptors!

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Update PEP

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4 thoughts on “Update PEP

  • April 23, 2015 at 7:39 pm
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    Nice strategy. For this call PEP150515C00105000, you sell a naked call right? My options level doesn’t allow me to do so yet.

    Reply
    • April 23, 2015 at 8:20 pm
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      MU,

      The call is technically naked and the strategy is never allowed in tax advantaged account. For taxable accounts, some brokers consider you covered with very deep in the money long calls as you can resolve a short position by early exercise. You have to ask if you don’t have level 4. Who is your broker? There are plenty of discount brokers now that have done away with “options levels” and just grant everyone full access. I use Interactive Brokers which grants full access to anyone who can pass their online test. Pretty easy since the test is not timed and “open internet.”

      Reply
  • April 23, 2015 at 8:26 pm
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    I currently use sogotrade. I’ll take a look into the option levels. Thank you.

    Another question: since your bought PEPE call at strike price $85, and with expiration date in 2017, why don’t you sell a put at $85 with the same expiration date? I think it is pretty safe with the strike price at $85 and such long time frame for PEP.

    Reply
    • April 23, 2015 at 10:57 pm
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      MU,

      That’s a good idea and I can’t tell why I’ve never considered it. The additional margin requirement would be almost nil at that distance from the money. I’ll have to give some thought to combining diagonals with collars.

      Reply

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