The Money Tree

Safely Generating Income in Retirement

New Trade – PEP

Posted by mounddweller on February 19, 2012

Fellow Traders,

Earlier this week, Wednesday to be exact, I entered a NP trade on a stock I previously had never traded.  Here’s the trade I executed:

STO 2 MAR PEP $62.50 puts at $0.80.

At the time Pepsi (PEP) was trading around $63.40.  Since then it has continued to fall.  It closed Friday at $62.68.  So why did I decide to trade PEP?  Well, quite honestly because I wasn’t finding much else on my normal watch list that I liked.  So, given the recent steep drop in PEP since they announced lackluster earnings, I decided they were looking oversold and were due for a bounce.  Thus far, it looks like my logic was faulty and they may have further to fall.  However, that’s the beauty of trading large-cap, blue-chip companies.  You can be wrong in the short-term but still come out looking like a genius in the long-term.

If PEP does not bounce before MAR expiration I will have a decision to make, either let the stock be put to me at $62.50 or roll out the MAR puts to APR or maybe even JUN.

If I take assignment at a net cost of $61.70 I will be earning about 3.4% in dividends.  PEP has a good history of growing its dividend.  In the past five years it has grown from $0.30/quarter to $0.515/quarter.  That’s a compound growth rate of about 14%/year.

If I roll out a month or two my objective would be to earn 1%/month in put premiums.  If volatility stays low that may be difficult.  If volatility picks up it should be very achievable.

Regards,

Troy

 

One Response to “New Trade – PEP”

  1. James said

    I’m also in this trade at .70, but seeing as how much PEP continued to drop when the rest of the market was staying up, I think we could revisit sub-60, or at least test 60. Anything under 60 and I would expect a quick bounce back up over 62.5.

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