Pepsi Covered Call Hits the Spot

| About: PepsiCo Inc. (PEP)
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I think that the overall stock market risk level is fairly high now, but I think if we get an economic shock or approach a recession, the Fed will be forced to lower interest rates which could boost some weaker market sectors (like financials) higher. I've been looking to raise the quality of my portfolio and use covered calls as a way to stay invested.

I recently put on a covered call position with Pepsi (NYSE:PEP). I am long Pepsi shares and short the Jan. 2009 leap calls at a strike price of 70. I like writing longer term calls on stocks like Pepsi because it has been raising its dividend payouts consistently. Most options models do not properly take into account the likely future dividend increases, so the call premiums are probably a little higher than they should be.

Pepsi has an A+ rating and is one of the strongest companies out there. They have good management, a high return on equity and is now available at a fairly low forward P/E ratio of 17.5. I also like the fact that Pepsi has a lot of international exposure in case the US dollar continues to weaken.

Disclosure: I am long Pepsi stock and short the Jan. 2009 70 Pepsi calls.

PEP 1-yr chart: