PEP Option Traders Optimistic

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PEP Option Traders Optimistic

Optimistic investors have begun to buy up PepsiCo (PEP) share prices ahead of the company’s quarterly results report. There is no way to foresee the direction of a stock following an earnings report. A comparison of the price movement of stock prices and option prices, on the other hand, demonstrates that if PEP shares fall, causing a reversion back to its 20-day moving average in the first few days following the announcement, downside-focused traders will be in a position to benefit the most.

Key Takeaways

  • Traders and investors have started to push PepsiCo’s share price up ahead of the announcement.
  • PepsiCo’s stock price just surpassed its 20-day moving average.
  • Put options are priced for a lower loss, while call options are priced for a higher gain.
  • The volatility-based resistance and support levels are set to fall.
  • This arrangement gives traders a better chance of profiting if the price decreases.

Investors who wish to safeguard their holdings or speculators who seek to benefit from accurately projecting unexpected swings in an underlying stock or index engage in option trading. That is, option trading is a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both stock and option price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below displays PepsiCo’s share price activity and the setup building up to the earnings announcement.

Current Trends

The stock’s one-month chart shows it rebounding off a bottom support level and going upward, with PepsiCo rising from $144 per share to over $150 in the last few days as the announcement approaches. As seen on this chart, the price rose from the center of the trading range to above the 20-day exponential moving average (EMA). The indicators used in the research are 20-day Keltner Channel indicators. These are price levels that are multiples of the stock’s Average True Range (ATR). This array emphasizes how the price has shifted from the bottom of the middle range to the higher boundaries. This is a positive price movement for PepsiCo shares.

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Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average number of time periods employed in its computation is 10 to 20, which encompasses one to two weeks of trade on a daily chart.

In this context where the price trend for PepsiCo made a move upward over the previous month, chart watchers may detect that traders and investors are expressing confidence coming into results. As a result, chartists must decide if the move foreshadows investors’ expectations for a positive earnings release. One source of evidence to support the assumption that investors are anticipating positive news from the business report may be found in the comparison of the volatility range indicated on the chart by the purple lines and the purple box in the backdrop. Prices have risen, although they are still far from the top of this range.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders have priced their options to wager that PepsiCo shares will close inside one of the two boxes illustrated in the chart between now and July 16, the Friday after the earnings report is announced. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 74% probability that PEP shares will settle inside this range at the end of the week. The red box reflects the cost for put options with a 35% chance of going lower after the announcement.

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It is worth noting that 10,859 call options were exchanged on Friday, compared to 7,112 put options. This reveals the option buyers’ prejudice. As illustrated in the chart below, the 1.5:1 call-to-put ratio indicates that option traders are anticipating largely good news and are biased toward a rise upward.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric creates closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months. The levels marked by the turns are noted in the chart below. It is interesting in this chart that the call option and put option prices are so close, with lots of room to run on either side. This shows that option purchasers are unsure about how the firm will report. Although investors and option traders may not anticipate it, a surprise report might cause prices to surge or fall drastically.

These support and resistance levels indicate less support for prices if they fall and more resistance for prices if they increase. As a consequence, especially due to the clear bias that option purchasers have toward positive news, poor news may take investors off guard and trigger an unexpectedly big move. Analysts who have uncovered excellent grounds to predict a positive report may be driving the quick rise in pricing. PepsiCo shares climbed around 4.6% in the days after the prior earnings report. If investors’ expectations are unfulfilled, a significantly larger downward move might occur.

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Market Impact

While PepsiCo is not traditionally seen as a bellwether stock, its high profile gives it market influence. As a result, any unfavorable news from the firm may scare investors and have a rippling effect across the markets. This might have an effect on broad market exchange traded funds (ETFs) like Invesco’s Nasdaq 100 Index ETF (QQQ).

Bottom Line

PepsiCo option traders piled into call options before of the earnings release, anticipating extremely favorable news from the business. If such news does not come true, PepsiCo’s stock might plummet significantly. Put options on PepsiCo are not currently trading in a broad range, therefore traders are ignoring the potential of a major price decline to some extent. The volatility price range suggests less upside for calls than for puts, making it more difficult for call purchasers to benefit in the case of a comparable significant move either way.

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