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Demand For PepsiCo Options Bubbles Over As Shares Fizzle

Posted on the 21 July 2011 by Phil's Stock World @philstockworld

Today’s tickers: PEP, CAKE, GNW & WAG

PEP - PepsiCo, Inc. – Options traders flocked to PepsiCo to initiate bearish stances on the global food, snack and beverage company today, with shares in the Purchase, NY-based Company sliding as much as 5.4% to a session low of $64.79. Shares in the world’s largest snack-food maker fell after the company said profit growth this year will be lower than previously estimated. PepsiCo reported second-quarter earnings of $1.21 a share ahead of the bell this morning, which met average analyst expectations for the quarter. The full-year revision from the company spurred seemingly outright bearish players to its options. Investors appear to be selling calls in the front month, as well as in the September contract, to pocket available premium in the expectation that shares are unlikely to recover in the near term. More than 4,700 now in-the-money calls changed hands at the August $65 strike against paltry previously existing open interest of just 398 contracts. Investors sold the bulk of the options to pocket an average premium of $1.18 a-pop. Call sellers keep the full amount of premium as long as PEP’s shares slip beneath $65.00 by expiration day next month. Bearish sentiment spread to the August $67.5 strike where another 2,000 calls sold for an average premium of $0.38 per contract. Traders also sold the majority of calls exchanged at the September $65 and $67.5 strikes today. PepsiCo put options are on the move, as well. Investors selling some 1,500 of the August $62.5 strike puts at an average premium of $0.30 each appear to expect shares to maintain above that level through August expiration. Implied volatility on PepsiCo is down 6.8% to stand at 13.88% post-earnings.

CAKE - The Cheesecake Factory, Inc. – Options trading patterns on the operator of full-service dining restaurants suggests some investors expect shares in Cheesecake Factory to stagnate over the next several weeks. Second-quarter earnings met analyst expectations, but lower-than-expected revenues for the quarter trimmed as much as 5.2% off of CAKE’s shares resulting in an earlier session low of $31.00. The stock was cut to ‘Neutral’ from ‘Buy’ at Buckingham Research today. Traders positioning for CAKE shares to hover around the $31.00-level in the near term appear to be selling straddles in the August contract. It looks like investors sold roughly 2,000 of the August $31 strike straddle for an average gross premium of $2.04 apiece. Sellers keep the full amount of premium if shares in Cheesecake Factory settle at $31.00 at expiration in roughly 5 weeks time. Traders short the call and put combination run the risk of losing money should CAKE’s shares swing above the upper breakeven price of $33.04, or slip beneath the lower breakeven point at $28.96 by expiration day in August. Other strategists populating CAKE put options are betting the price of the underlying is unlikely to decline much further ahead of expiration next month. It looks like nearly 1,000 puts sold at the August $30 strike for an average premium of $0.50 each, while some 500 puts likely sold at an average premium of $0.36 apiece at the August $29 strike. Options implied volatility on the restaurant operator stands 24.2% lower on the session at 27.69% as of 2:00 pm on the East Coast.

GNW - Genworth Financial Corp. – Shares in the insurance company dropped like a rock this morning, losing as much as 20.2% of their value at times to touch an intraday- and new 52-week low of $7.56. Despite the sharp plunge in the price of the underlying, it looks like investors populating Genworth options today are positioning for shares to bounce back in the next couple of months. The Richmond, VA-based insurer’s shares fell after the company reported a second-quarter net loss of $0.19 to $0.23 a share in a preliminary earnings report released Wednesday. Genworth is scheduled to release its full earnings report after the final bell next Wednesday. Shares in GNW are well off their lows of the session, but still trade 11.9% lower on the day at $8.34 as of 12:30 pm ET. Options traders paid far more attention to calls on the stock than puts, with the call-to-put ratio up over 4.5 in early-afternoon trade. It looks like most of the fresh trading in GNW calls was initiated by buyers positioning for a near-term rebound. Volume is heaviest in the front month where traders purchased more than 5,500 in-the-money calls at the August $8.0 strike for an average premium of $0.40 each. Another 10,800 calls were purchased up at the August $9.0 strike at an average premium of $0.12 apiece. Investors long the higher-strike calls profit in the event that shares rally 9.4% over the current price of $8.34 to surpass the average breakeven point at $9.12 by August expiration day. Call buyers showed an interest in the September $8.0 strike options, as well. The sharp drop in GNW shares and the rise in demand for options lifted implied volatility on the stock 25.8% to 57.84% this afternoon.

WAG - Walgreen Co. – Activity in January 2012 contract call and put options on the nation’s largest drugstore chain suggests some strategists expect Walgreen’s shares to rise in the six months remaining to expiration. Shares in Walgreen Co. fell 3.35% to $40.40 this afternoon, edging up off an earlier session low of $39.92, on reports Express Scripts agreed to buy rival Medco Health Solutions for $29.1 billion. Investors positioning for a rebound in the price of the underlying appear to have sold some 5,000 puts at the Jan. 2012 $38 strike for an average premium of $1.90 each in order to buy around the same number of calls up at the Jan. $2012 $43 strike at an average premium of $1.80 a-pop. The transaction yields a net credit of $0.10 per contract, which investors keep as long as WAG’s shares exceed $38.00 through expiration day next year. Additional profits are available to the traders should the stock rally 6.4% over the current price of $40.40 to surpass the effective breakeven point on the upside at $43.00 at expiration. Shares in Walgreen Co. closed above $43.00 as recently as July 12. Traders short the puts are obliged to take delivery of the underlying stock at $38.00 in the event that the puts land in-the-money and are exercised at expiration. Shares at the $38.00-level would represent a 16% discount off the stock’s recent 52-week high of $45.34. Perhaps investors short the puts are happy to get long Walgreen Co. at that price point, particularly after having received a $0.10 credit for accepting that risk.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst

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Demand For PepsiCo Options Bubbles Over As Shares Fizzle
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