Market Insights

PepsiCo began September with a failed rally, and a big options trade yesterday seemed to target further downside.

This large transaction was detected yesterday afternoon in the soda and snacks company:

• 30,000 October 140 puts were sold for $3.40.
• 40,000 January 135 puts were bought for $4.43.
• Volume was below open interest in the October contracts but not in the Januarys. That suggests an existing position was closed and rolled forward in time and down in price.

Puts gain value when prices fall because they fix the level where a security can be sold. Monday’s trader apparently entered the session with a profitable position in the October 140 puts. He or she unloaded those contracts and purchased the January 135s.

The adjustment cost roughly $7.5 million and gives them an additional three months of downside exposure. The new position will perform similarly to the old one because they both have a delta of roughly -1.2 million. However, there’s potentially more leverage now in the event of a big drop because the number of contracts increased.

PepsiCo (PEP), daily chart, with select patterns and indicators.

PEP ended the session down 2 percent at $140.64, its lowest closing price in over two months. The parent of brands like Mountain Dew and Rold Gold hit a five-year low in June before rebounding on strong quarterly results. It jumped further on September 2 after activist firm Elliott Investment Management took a $4 billion stake and pushed a turnaround plan.

Sellers hammered the stock that day and have remained active since. They drove PEP below its 200-day moving average last week — despite the broader market climbing to new record highs. Larger rival Coca-Cola (KO) has also struggled.

Overall option volume in PEP was about the daily average in the last month, according to TradeStation data. Puts accounted for a bearish 86 percent of the total.

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