This Thursday Yum Brands (YUM) is holding their annual analyst day in NYC. Given McDonald’s (MCD) disappointing global sales (including Asia) where YUM gets more than half of their sales, I could see YUM giving some downbeat commentary and may even update guidance for the current quarter (the company is not expected to report their Q4 until Feb 4th.)
Options market makers are treating this week’s meeting as a market moving event. With the stock at $76.50, the Dec weekly 76/77 strangle (long the 76 put and the 77 call) is offered at about $2.30, or about 3% of the underlying stock price. If you were to buy the implied move this week, you would need a move above $80.15, or below $72.85 to make money. As regular readers know, we think buying event moves with long premium strategies is a tough way to make a living, but for those with a directional inclination into Thursday’s event, options could be attractive. Options prices could continue to increase if the stock has a negative reaction to this week’s meeting:
The stock’s recent 20% gain from the October lows places it at specific risk to near term headwinds from the strengthening dollar coupled with potentially weakening demand abroad.
YUM is down 2% today so the timing on a short term event trade was better on Friday. However, when YUM reverses it tends to reverse hard. We’re going to look out to Jan and pick up a fairly dollar cheap put spread to play for a reversal back towards the October lows:
TRADE – YUM ($76.60) Buy the Jan 75/70 put spread for 1.15*
– Buy 1 Jan 75 put for 1.55
– Sell 1 Jan Jan 70 put at .40
Breakevens on Jan expiration:
Profits: between 73.85 and 70 make up to 3.85, max gain of 3.85 at 70 or below
Losses: between 73.85 and 75 lose up to 1.15, above 75 lose full 1.15
Rationale: The stock appears to be a tad bit extended in the face of what could be a potentially volatile event. *While I don’t love enetering a short biased position on a big down day in the market and the stock, I am going to start small, and look to add over the next couple trading days.