PepsiCo (PEP) 11/20/09 PriceWatch Alert With 2.10% Downside Protection

Posted: Friday, November 20, 2009 8:42 AM EDT

PepsiCo (NYSE: PEP) closed yesterday at $61.88. So far the stock has hit a 52-week low of $45.39 and 52-week high of $62.94. PepsiCo stock has been showing support around 61.03 and resistance in the 62.53 range. Technical indicators for the stock are Bullish and S&P gives PEP a neutral 3 STAR (out of 5) hold rating. PEP appears on the Investors Observer Analysts Favorites list. For a hedged play on this stock, look at a Jan '10 62.50 covered call (PEP AZ) for a net debit in the $60.58 area. That is also the break even stock price for this trade. This covered call has a 57 day duration, provides 2.10% downside protection and a 3.17% assigned return rate for a 20.30% annualized return rate (comparison purposes only). A lower cost hedged play for this stock would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the PEP Jan '11 45 Call (VP AI) and selling the Jan '10 62.50 call (PEP AZ) for a $15.80 debit. The trade has a 57 day life and would provide 1.75% downside protection and a 10.76% assigned return rate for a 69.00% annualized return rate (for comparison purposes only). PepsiCo has a current annual dividend yield of 2.88%. [FBB-Seven Summits Research]

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