Options Corner: PepsiCo Popped But There's Still More Fizz In The Can

Conventional wisdom dictates that if an investor is reading about a major business event, the underlying opportunity has already passed. In that context, food-and-beverage giant PepsiCo Inc PEP might not seem like an alluring idea, given that the company recently acquired prebiotic soda brand Poppi. Nevertheless, there may be a lot more to PEP stock than a buyout.

To be sure, PepsiCo's acquisition of Poppi — a deal worth $1.95 billion — is a significant move. Fundamentally, demand for prebiotic beverages is rising. In 2023, the global market for probiotic sodas reached $242.1 million in 2023. Analysts project that by 2031, the sector could be worth $422.4 million, implying a compound annual growth rate of 7.1%. To note, probiotics refer to live microorganisms while prebiotics help maintain the balance of these microorganisms.

Politically, PepsiCo's acquisition also helps align the company with the Trump administration's broader public health policy, as framed by Robert F. Kennedy, Jr. who will lead the Department of Health and Human Services (HHS). Throughout the 2024 campaign trail, Kennedy promoted the drive to enact stricter health and nutrition regulations.

On a more cynical level, though, PEP stock could potentially rise based on current economic challenges. It's no secret that households have been struggling under the weight of accelerating prices and growing uncertainty amid escalating trade wars. Subsequently, headlines such as soaring gold prices and recession fears have dominated the business news cycle.

Because consumers are struggling, PepsiCo could benefit from the trade-down effect. Essentially, households may steadily reduce discretionary expenditures by redirecting toward cheaper alternatives. For instance, families could choose to eat out less, thereby increasing trips to the grocery store. That could benefit PepsiCo as one of the leaders of mass-produced, low-cost beverages.

Bullish Sentiment Could Be Returning To PEP Stock

Of course, anyone can wax poetic about a blue-chip brand like Pepsi. At the end of the day, an investment is only viable if it actually delivers positive results — a painfully obvious point. In that regard, PEP stock is compelling as the market has essentially drawn a line in the sand.

From a technical perspective, PEP has charted what appears to be a double-bottom formation. Earlier this year, the bears attempted to drive the price below the $142 level. However, the bulls moved in, sending the equity above $155. Another distinctively bearish effort emerged, which saw PEP fall to around $143. After some tight negotiations, the security resolved upward again.

Looking at a longer-term chart, the main target for the bulls appears to be the $160 level, where strong resistance lies. Keep in mind that analysts from a consensus view are forecasting that PEP stock will reach $174. Therefore, $160 would seem a rational target.

It must be said, though, that as a blue chip, PEP might not benefit from substantial kinesis as one might expect from a high-flying tech stock. For swing traders, lowering the expected price target could be more effective. Fortunately, PEP enjoys an upward bias, making speculation with options a more comfortable approach, relatively speaking.

Using pricing data from January 2019, a long position held for an eight-week period statistically has a 57.59% chance of being profitable. That's a solid baseline to bank on. Even better, there's evidence that investors appreciate modest dips.

Last week, PEP stock fell 4.7%. Following a one-week loss of up to 5%, an eight-week long position has a 59.56% chance of rising, slightly better than the baseline. Also, the long odds peak at 67.65% four weeks following modest volatility, which is rather conspicuous.

Plotting A Bullish Strategy For PepsiCo Speculators

Based on the market intelligence above, optimistic traders may consider the 150/155 bull call spread for the options chain expiring April 25. This trade assumes that PEP stock will slightly exceed the short strike price at expiration, thus triggering the maximum payout.

Transactionally, the speculator would buy the $150 call (at a time-of-writing ask of $560) and simultaneously sell the $155 call (at a bid of $284). The credit received from the short call would partially offset the debit paid of the long call, resulting in a net cash outlay of $276. Should the trade go as planned, the max reward is $224, or a payout of about 81.2%.

The reason for the late April expiration date is that historically, PEP stock, while it may benefit from a higher likelihood of upside, does not benefit from magnitude of growth. Still, traders can choose to take the risk of a shorter route to expiration for the possibility of greater rewards.

For example, if a trader wants to play the fourth-week probability boost mentioned earlier, the 150/155 bull spread for the April 11 expiration date is available. This trade bumps the payout to 99.2%. Statistically, though, PEP stock would be projected to reach just under $153 at expiration, which would only make this spread partially profitable.

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