PEP covered call strategy

PepsiCo, Inc. (PEP) has recently released its Q1 2019 results. Based on my outlook I have employed the use of a conservative option strategy to generate additional income from our underlying shares.

This article looks at the potential outcome of this trade (including the breakeven point) using various stock prices.

Summary

  • PEP released its Q1 2019 results on April 17, 2019 and the share price jumped to a new 52-week high.
  • I view PEP as richly valued considering it is a mature company in the low growth packaged foods industry.
  • My opinion is that an overall market pullback will occur within the next 6 months.
  • I think PEP’s share price will behave defensively but the share price will experience a modest pullback.

Introduction

Following PepsiCo, Inc.’s (PEP) release of its Q1 results on April 17th I initiated a conservative out-of-the-money covered call  option trade the morning of April 18th. My preference is to provide timely updates on my investment decisions but moments after placing my PEP covered call trade we left town to visit friends and family for the Easter weekend; we  returned home April 23rd.

The last time I reviewed PEP was in this February 17, 2018 post. In that post I discussed how PEP was rewarding shareholders despite its challenges and noted that:

  • PEP’s products are sold in 200+ countries and territories;
  • it has 22 billion-dollar brands;
  • it holds a low 20% market share.

North American carbonated soft drink consumption continues to be sluggish and ever increasing competition from niche players has presented PEP with recent volume challenges. Its brand strength, however, remains intact.

PEP is expanding its international presence and product portfolio. Significant investment is being made in developing e-commerce capabilities. In addition, PEP is spending heavily on R&D and it continues to innovate among its ancillary brands as evidenced by a host of new products.

At the time of my previous PEP post, shares were trading at ~$111. Fast forward to April 17, 2019 and PEP’s share price jumped $4.60/share to a new high of ~$127.

Based on management’s guidance, current market conditions, and my opinion on PEP’s valuation I decided to initiate a covered call on some of our underlying PEP shares. My rationale for writing covered calls was to:

  • collect cash income at the time of the trade;
  • get a small amount of downside protection if PEP’s stock price declines.

Covered calls do NOT protect me in the event PEP’s share price plunges.

Should PEP’s share price skyrocket prior to expiry of the options I wrote I will need to take appropriate action so my shares do not get called away.

Let's look at what are the possible outcomes using various stock prices. (cont’d.)

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Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to charles@financialfreedomisajourney.com.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long PEP.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.