Investors have slightly bid down the share prices of PepsiCo, Inc. (PEP) ahead of the company's fiscal fourth quarter earnings announcement. After the share price has remained in a relatively strong upward trend for the majority of the quarter, the short-term sell-off could be a signal that traders and investors are skeptical toward the company's earnings outlook. Analysts expect the food and beverage company to report $1.52 in earnings per share (EPS) with $24.24 billion in revenue.
PepsiCo shares have largely benefitted from rising inflation, as investors have begun rotating into sectors better suited to outperform during times of high interest rates. However, rising costs could also have a significant impact on the bottom line for PepsiCo, and investors will be watching the earnings report closely to see how the company has been able to manage higher costs on everything from materials to labor and transportation.
Option traders appear to be positioning themselves for the PepsiCo share price to rise after earnings. That's because, while the open interest features a higher number of put options than calls, implied volatility suggests that traders are selling downside puts while buying upside calls.
- Traders and investors have slightly bid down the PepsiCo share price ahead of earnings.
- The PepsiCo share price recently closed below its 20-day moving average.
- The volatility-based support and resistance bands have significantly widened ahead of earnings, showing an increase in volatility and option pricing.
- PepsiCo shares remained in a relatively strong upward trend for the majority of the quarter.
- The PepsiCo share price has recently closed above a thin zone of buying based on volume.
An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward PepsiCo stock. The chart below depicts the recent price action for the PepsiCo share price as of Tuesday, Feb. 8.
This chart highlights how the PepsiCo share price has risen throughout the quarter, highlighted by the green arrow. Outside of the current share price activity, the only time PepsiCo stock traded under the 20-day moving average during the quarter was briefly in late November 2021, right before PepsiCo paid its dividend for the quarter. This area is visible on the chart with the "D" on the bottom axis. The share price has recently closed below the 20-day moving average in the days before earnings. This could be profit taking before an unexpected result, as investors may be wary of the potential outcome.
The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for PepsiCo stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.
The average true range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.
It's notable that these bands remained relatively narrow as the PepsiCo share price moved to the upside for the majority of the quarter. That could mean that option traders did not foresee large, outsized moves for the stock during this time. These bands have widened significantly in late January, highlighted by the purple arrows. This could mean that uncertainty is chipping away at the sentiment toward PepsiCo stock ahead of earnings.
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.
Volume Profile and Option Outlook
A comparison between price action and option trading can provide insight into the sentiment of traders and investors toward a company's performance in the near future. However, further context of price action in terms of volume could illustrate areas of support or resistance, which could provide context to option open interest. The chart below illustrates the recent price action of PepsiCo, in addition to a price-based volume pattern on the left-hand side.
This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.
This chart highlights how the PepsiCo share price has recently traded above a relative thin zone of buying volume, highlighted in green. If the PepsiCo share price were to move to the downside, this area could act as a zone of support as investors defend their positions at these prices.
The red line that stems from the volume profile and stretches across the entire chart is a significant volume-based price level known as the "point of control." This is the area where volume is the heaviest, as bulls and bears fight for "control" of the share price. The point of control on this chart is around the $174.50 level, which is interesting once considering open interest levels.
Recent option trading volumes favor calls over puts at a nearly 3-to-1 ratio. At first glance, this is bullish. In addition, the open interest features 108,000 calls compared to 125,000 puts, which, at first look, would be bearish. Because of the disparity in terms of bullish and bearish sentiment in regard to volume and open interest, further analysis is required.
For Feb. 18, the next monthly option expiration date, the single option with the highest open interest is the $175 call, with 5,300. This option currently represents just over 1% upside to the current PepsiCo share price. This option also coincides roughly with the volume-based point of control level. If these bets were to unwind, it could place significant downward pressure on the PepsiCo share price.
There remains over 4,500 options in the open interest spread across the $160, $162.50, and $165 put strikes. These options represent 7%, 5%, and 4% downside to the PepsiCo share price, respectively. The current implied move for PepsiCo stock after earnings based on at-the-money straddle pricing is 2.2%. At first glance, this could mean that speculators are placing bets on a larger-than-expected downside move for PepsiCo after earnings. However, it should be noted that implied volatility for these puts is dropping while open interest is rising, indicating that traders are taking short positions in these options.
On Jan. 12, a trader opened 2,000 straddles on the Feb. 18 $170 strike. The total cost for this position is $7.34 per contract, or $734. If long this straddle, this position would be profitable if PepsiCo stock moved 4% on earnings, which is nearly double the current implied earnings-based move of 2.2%. If this trader is long this straddle, that means they are placing a $1.5 million bet that the PepsiCo stock will move more than current option pricing is projecting. If short this straddle, this trader is placing a large bet that the PepsiCo share price will remain in a range after earnings.
The PepsiCo share price has trended upwards for the majority of the quarter, only recently showing any weakness. Volatility has risen ahead of earnings, as investors appear unsure of the PepsiCo earnings outcome. Option traders, however, appear to be buying upside call options while selling downside puts, reflecting a bullish sentiment toward the PepsiCo share price.