For the most part, the markets have been acting in a bullish manner, save for a few sessions during the past month in which it closed lower. There have been bearish reversals that have potential, but they can be short-lived. Here is a trade idea that counts on a reversal lower in Yum Brands (YUM) in a short time frame.
Yum Brands (YUM – $73.97): Bear Put Spread
The trade: Buy the YUM Nov 22 73/74 Bear Put Spread (buying the Nov 22 74 put and selling the Nov 22 73 put) for 45 cents or less.
The strategy: The bear put spread entails buying a put and selling a lower-strike put with the same expiration. The maximum potential profit for this trade is 55 cents ($1 – $0.45) if YUM stock is trading below $73 at Nov. 22 expiration. The maximum loss is 45 cents (or what was paid for the spread) if YUM is trading above $74 at expiration. Breakeven is $73.55 based on a cost of 45 cents.
The rationale: Yum Brands’ same-store sales fell by 5% during October. Sales have been suffering in China due to an avian flu outbreak which has affected their KFC stores. China counts for more than 40% of the company’s operating profit and sales have been slowing at the KFC chain, which in turn caused the company to lower its full-year guidance. We could dig deeper into the current fundamentals of YUM, but that’s really not what this trade idea is counting on for success.
The true reason this trade idea looks good is because of the chart.
Click to Enlarge After YUM stock moved lower in early October after earnings, it has been on quite the run higher. For this trade to work, all good things need to come to an end.
Looking at a two-year chart, you can see that YUM has been unable to significantly move above the $74-$75 area with any success. Yum Brands has been known to go on runs, and now it might be time for a short run down, which is why next week’s expiration is the target.
A close over $74 might doom the trade and should be considered a bullish sign.
YUM stock might continue to move higher in the long run, but a quick reversal might be just what the Colonel ordered!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.