This is my penultimate Barchart.com commentary of 2023. Where did the time go?
Anyway, a quick look at Wednesday’s unusual options activity in preparation for today’s piece provided an easy topic to discuss. Coca-Cola (KO) and PepsiCo (PEP) had nine unusually active options yesterday.
While I’m sure many Coke and Pepsi products have been consumed over the holidays, I’m scratching my head for an answer as to why there was so much action in the two beverage giants.
Even weirder, all nine of the options expire in 22 days. Admittedly, I’m a newbie to options, having first written about them for Barchart starting in February 2022. Before that, I was a relative spectator when it came to options.
Over the past 23 months, I've learned how much I don’t know about options. That said, I’m glad I’ve broadened my investment horizons. But I digress.
Why were investors so interested in KO and PEP stock on Wednesday? I'd like to think about the possibilities.
Share Volume Wasn’t High
On Wednesday, Coca-Cola had a share volume of 8.56 million, 55% of its 65-day average. PepsiCo’s was 3.5 million, or 61% of the average over the past 65 days. Now, granted, it is the week between Christmas and New Year’s. That’s never a volume bonanza, so perhaps 55% and 61% of their respective averages are, in fact, heavier than regular trading.
From an options volume perspective, Coke’s was 84,815, 49% higher than its 30-day average, while PepsiCo’s was 45,352, 56% higher than the 30-day average, indicating investors were sniffing around more than usual.
PepsiCo’s daily options volume in December was over 40,000 in just three of 18 days. For Coke, it was also over 80,000 on three occasions out of 18. Hmm.
Having yet to look closely at the options trading for these two stocks, common sense suggests that they historically trade in tandem.
But that doesn’t answer my why.
Hitting 52-Week Highs
As you probably know, we’re in the middle of a Santa Claus rally. Barchart contributor Rich Asplund talked about this very subject yesterday. The Nasdaq 100 hit a record high. Interestingly, PepsiCo is a constituent, while Coca-Cola isn’t. Instead, Keurig Dr Pepper (KDP) belongs. It did not have above-average options volume on Wednesday.
So, this is a Coke/Pepsi thing rather than a broader beverage play.
Coca-Cola stock hit its 52-week high of $64.99 in April, while PepsiCo hit its 52-week of $196.88 in May. Even that’s almost lockstep with each other. KO stock is down nearly 10% since then while PEP is off 14% since hitting its high in late spring.
Investors may see another move higher on the horizon for both companies. However, scanning the internet, I’ve been unable to find any news that explains the interest.
We’ll have to take a closer look at the options themselves.
One Lonely Call
As I said, there were nine unusually active options Wednesday (DTEs of 7 days or more) with just one call; the rest were puts.
The call was a KO Jan. 19/2024 $57 strike with a volume-to-open-interest (Vol/OI) of 9.52. The call’s ask was $2.31, a 4% down payment on Coca-Cola stock. With 22 days to expiration, the delta of 0.74954 means you can double your money with a $3.08 move in its share price (5.2%) over the next three weeks. It did that in early October, so it’s not out of the realm of possibility.
Now, let’s look at the eight puts. They were split evenly between KO and PEP. Four had Vol/OI ratios above 20, with PepsiCo accounting for three. All three were deep in the money. So, the PepsiCo Jan. 19/2024 $185 strike had the top Vol/OI ratio at 29.77. The bid was $15.20 for a net $169.80, 40 cents higher than yesterday’s closing price. It was also the put that was least in the money.
The $200 strike was the most in the money. Its bid price was $30.15, for a net $169.85. The one least in the money is the $180 strike. It is the best bet if you want to sell the put for potential income. It has an annualized yield of just under 100% and a net price of $169.90 should you have to buy the shares.
However, to keep your $10.10 in premium income, PEP shares must increase by 6% over the next three weeks. It hasn’t traded above $180 since September. On the other hand, the bottom was around $158, so your downside is likely only $300 or $400 in paper losses should you have to buy the shares.
Turning to Coca-Cola’s four puts, one is deep in the money, two are in the money, and the fourth is out of the money. That’s the one I’ll focus on.
The Jan. 19/2024 $57 strike had a bid price of $0.22. That’s an annualized yield of 6.6%. That’s not a huge income, but you have less chance of losing your shirt should the price lower in the next three weeks.
The Bottom Line
I see two things from yesterday’s trading.
Both stocks are attracting attention from the bearish crowd through Bear Put Spreads. Secondly, the $57 KO call suggests some investors believe that Coca-Cola’s stock is a good buy in the high $50s. Conversely, the lack of unusually active PEP calls means the same feeling doesn’t exist for PepsiCo in the high $160s or low $170s.
Which stock would I rather get stuck with? I prefer the food diversification PepsiCo offers through Frito Lay and Quaker Oats. But that’s a discussion for another day.
Now that I’m aware of the Coke/Pepsi options dance, I’ll be sure to pay closer attention in the future.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
