PEP Analysis

Pepsico Inc. (PEP)

Update 10/4/2017: PEP reported earnings of $1.48, compared to a Street estimate of $1.45. The stock was $2.15 below my entry price at the time I exited, with the options position at 8.5% of maximum potential profit, well below my 25% target.

The declined was greater than the average over the prior four earnings announcements, and far greater than the central tendency. The expected move, $2.21, proved to be almost on the money, and in the future I shall give that greater weight in my decision making.

My experience has been that waiting to exit will rarely turn a sow’s ear into a silk purse. The main question is when during the day after earnings should I exit. In this case, I could have improved by results by a bit had I waited an hour. Even so, I couldn’t read the future an hour ago, and I shall never regret taking my profit off the table. It’s not always the most profitable decision, but it is the most prudent.

Shares declined by 2.0% over my one-day holding period, or a -718% annual rate. The options position produced a +9.3% return for a 3,387% annual rate.

PEP publishes earnings on Wednesday before the opening bell.

I shall use options that trade for the last time 10 days hence, on Oct. 13.

Implied volatility stands at 17%, which is 1.8 times the VIX, a measure of the volatility of the S&P 500 index.

PEP’s IV stands in the 65th percentile of its annual range and at the peak of its most recent broad movement.

The price used for analysis was $109.02.

Premium: $2.12 Expire OTM
PEP-iron fly Strike Odds Delta
Long 113.00 88.9% 12
Break-even 111.12
Short 109.00 50.9% 50
Short 109.00 49.1% 50
Break-even 107.12
Long 105.00 85.7% 14

The premium is 53% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

The zone of profit in the proposed trade covers a $2.00 move either way. The biggest immediate move after each of the past four earnings announcements was $4.74, and the average was $1.53. After eliminating the maximum and minimum post-earnings movements, the central tendency is $0.61.

The expected move covering 85% of occurrences is $2.21, beyond the profit zone.

The bid/ask spread is 4.2%.

Decision for My Account

I have entered an order on PEP as described above. The stock at the time of entry was priced at $109.-04

The one downside to the trade is the 85% confidence expected move, which is 21 cents beyond the profit zone. The extreme narrowness of the central tendency of post-earnings moves persuades me that it’s a risk worth taking,

By Tim Bovee, Portland, Oregon, October 3, 2017


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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