Trade Update – $YUM: Closing Jan Put Spread for More Than a Double

by Dan December 10, 2014 9:54 am • Commentary

On Monday I initiated a bearish position on YUM (below) suggesting that their analyst day could serve as a negative catalyst for the shares given the stock’s recent 20% bounce off of the Oct lows, the recent woes articulated by MCDs, and the company’s massive exposure to China.  True to form for what I think is a less than credible management, downgraded their guidance for the second time this year with no shortage of excuses.  The stock is trading down towards the low end of my put spread (was as low as $71, but since bounced while writing).  Here was the trade from Monday when the stock was $76.60:

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

This was an event trade, so with the event out of the way, and the stock having done what I expected, but not to the degree I would have liked. The bid off of the lows is astounding to me, and I do not want to spend my morning watching a stock that should be trading $70 in my opinion, so I am going to take the money and run, I  see no reason to stick around and wait for anything to change.

ACTION: Sell to Close YUM ($72.50) Jan 75/70 put spread at $2.50 for a $1.35 profit




Original Post Dec 8th, 2014: New Trade $YUM – Taco Hell

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:

YUM 30 day at the money  IV from Bloomberg
YUM 30 day at the money IV from Bloomberg

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 2yr chart from Bloomberg
YUM 2yr chart from Bloomberg

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.