As the third quarter earnings season unofficially gets underway, options traders should be on the lookout for unique opportunities for swing trading using stock options. We start our opportunistic trading exercise of the third quarter today with an exploration of the options of PepsiCo, Inc. (NYSE:PEP).
PepsiCo with its market capitalization of $140.64B is a global food and beverage company. Through the Company’s bottlers, contract manufacturers and other partners, the Company makes, markets, sells and distributes a range of foods and beverages in more than 200 countries and territories.
Impressive Third Quarter Results
PepsiCo released its third quarter (Q3 2014) earnings result today to deliver another season of outperformance and to raise the full year (FY 2014) EPS guidance. PepsiCo has successfully beaten the consensus estimate on revenue and earnings two times in a row and it has raised its FY 2014 guidance for the second time this year.
Highlights of the third quarter results are presented below:
Pepsi reported third quarter earnings of $1.36 per share to mark a 10% year-over-year improvement from the $1.91 in the same quarter last year to beat the consensus analysts’ estimate of $1.29 by 5.4%
The company reported revenue of $17.22B to mark a 2% year-over-year improvement from the $16.91B in the same quarter last year and to beat the consensus estimate of $17.10B
Core gross margins improved 46 basis points (bps) buoyed by strong pricing, effective revenue management strategies and productivity gains
Core constant currency operating profit improved by 5.5% to $2.95B buoyed by net gains from divestures
Going forward, Pepsi expects core constant currency earnings per share to increase by 9% year over year, up from the prior guidance of 8% improvement. In addition, revenue is expected to grow in the mid-single digits compared to last year
The company reiterated its plan to increase shareholder cash returns by 35% this year to $8.7B through significant improvement in dividends and share buybacks
And the Market Responds…
Investors and traders reacted to Pepsi’s third quarter earnings release positively and the stock is still on its bullish ascent. Shares of PepsiCo are already up 18.61% in the last one year and the stock is up 12.88% in the year-to-date period. The stock is up 4.40% in the last three months and the stock is up by 0.25% to $94.18 per share as at 1:31PM EDT after making a new 52-week high of $96.22.
Interestingly, shares of Pepsi are trading up 2.64% above the 50-day moving average and the stock trades at 10.12% premium to the 200-day moving average. Shares of Pepsi have an RSI of 59.60, which leads me to believe that the buying action is just starting out on the stock and that the stock has more upside potential ahead.
How to Trade PEP Options
I recommend staying bullish on PEP options and I will be buying the in-the-money call options. Buying the PEP Apr 2015 92.500 call (PEP150417C00092500) at an asking price of $4.60 would set us up for profit when shares of Pepsi cross $97.10, which is just 3.10% up from the current share price. We will give the trade 6 months to develop into profitability.
Recommended Trade Setup:
– Buy PEP Apr 2015 92.500 call at $4.60 or less
– Set stop-loss at $4.10
– Set initial price target at $10 for a potential 117.3% gain in 6 months
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