Bears Remain Hungry for YUM

by Alex Hanson | February 1, 2012 10:04 am

With its ownership of KFC, Taco Bell, Pizza Hut, and other iconic brands, Yum! Brands (NYSE:YUM[1]) has built up a strong grip on the fast-food industry. This has served the conglomerate well: The shares have more than doubled in value over the past five years. The short-term hasn’t been too treacherous for YUM, either, with the stock rising 35% over the last 12 months and 7% since the beginning of 2012.

Yet the options-trading community appears to be targeting some short-term downside in the shares. In Tuesday’s trading, the March 60-strike put saw more than 7,500 contracts cross the tape. This option gives a buyer the right to sell the shares at $60 at any point up until the March options expiration on March 16. (The seller, meanwhile, is obligated to buy YUM shares at the same strike price).

Three large block trades transpired around 2:30 pm EST yesterday, and a total of 6,000 contracts traded for 98 cents apiece. These blocks were likely initiated by the same party (or related in some way), given the similarity in timing and size. It looks as though buyers were responsible for these orders since they traded at the ask price. If YUM were to breach the breakeven point of $59.02, gains are theoretically unlimited down to zero should the shares continue to tumble. Losses for a purchased put, on the other hand, are capped at 100% of the premium paid.

This wasn’t the first time 60-strike puts have been popular among YUM traders. Just last Tuesday, the February 60 put saw almost 24,000 contracts trade as midsize blocks changed hands throughout the trading session. These puts also provided buyers with the right to sell YUM shares at $60 but only until the February options expiration (Feb. 17).

Because these February puts have less time value than their March counterparts, they traded for a lower premium, changing hands at an average price of 80 cents per contract last Tuesday. One week later (at yesterday’s close), these same puts were trading at 57 cents apiece thanks to a slight gain in YUM shares and five days’ worth of time decay.

Last week, some analysts hypothesized that the bearishness on YUM sprung from a mixed earnings report from McDonald’s (NYSE:MCD[2]). The fast-food giant said that while earnings per share topped estimates, revenue retreated year-over-year. MCD also warned that 2012 profits could lag at the hands of exchange rates and increased costs. MCD shares dropped roughly 2.2% on the news.

YUM will report earnings after the market closes on Tuesday, Feb. 6. Analysts are expecting per-share results of 74 cents, compared with year-ago earnings of 63 cents. The investors buying up these 60-strike puts may be expecting the company to articulate similar revenue risks, prompting a short-term sell-off in the shares. From its Tuesday close of $63.33, however, YUM is a 5.3% drop to the 60 strike and more than that before the breakeven point is hit.

  1. YUM:
  2. MCD:

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