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Anticipating a Summer Pop, Bulls Lap Up PepsiCo, Inc.


Traders targeted PEP's near-the-money July 85 call in Wednesday's session.

Call volume surged on PepsiCo, Inc. (NYSE:PEP) yesterday, as 14,000 contracts traded -- or roughly five times the usual amount. By far the most active strike was the July 85 call, where nearly 10,500 contracts traded at a volume-weighted average price (VWAP) of $0.19. Because a majority of the transactions went off at the ask price, and open interest spiked overnight, it's safe to assume the calls were bought to open.

In this scenario, the traders stand to profit for every step north of $85.19 (strike price plus VWAP) PEP takes through options expiration next Friday. Potential gains are limited only by the price of the underlying, while the maximum potential loss is capped at the premium paid.

What PepsiCo saw during Wednesday's session was more of the same for the beverage maker. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity boasts a 50-day call/put volume ratio of 2.15. In other words, calls have been bought to open over puts at a rate of more than 2-to-1 in the last 10 weeks. The ratio places in the 85th percentile of its annual range, confirming a higher-than-usual preference for long calls over puts.

As a result of yesterday's session, PEP's Schaeffer's put/call open interest ratio (SOIR), which measures open interest on options expiring in the front three months, dropped from 1.07 to 0.93. Stated more simply, short-term call open interest is now higher than put open interest -- an indication that bullish winds are blowing toward the cola king.

It's little surprise, either. PepsiCo has tacked on nearly 23% year-to-date, and was already up over 1% to trade at $84.07 this morning at 10 a.m. EDT.

This article by Alex Eppstein was originally published on Schaeffer's Investment Research.

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