Today, we’re recommending a bearish trade on Yum Brands (YUM). The company, which operates the KFC, Taco Bell and Pizza Hut fast-food chains, is particularly sensitive to growth (or the lack thereof) in China.
The recent bounce in Chinese stocks is largely based on a rumor that the head of the People’s Bank of China is on his way out the door. That may be true, but it doesn’t mean a pro-easing chief will be installed. The risk that this is a whipsaw makes a bearish entry on YUM very attractive, especially given the overhang of Hong Kong pro-democracy protests.
We also like this bearish position as YUM deals with a PR nightmare in the form of animal abuse videos circulating online. True or not (in this case, it’s almost certainly true), these videos of YUM’s meat suppliers abusing cattle and livestock is going to be tough to deal with and could lead to downgrades. Keep in mind that YUM’s decline on July 31 was due to a similar PR/management problem when evidence surfaced that the company was using expired meat in its restaurants in China.
With all of this weighing on YUM shares, we recommend that you ‘buy to open’ the YUM November 72.50 Puts (YUM141122P00072500) for a maximum price of $2.60.
Also, we’d like to take a quick second to follow up on our American Capital Agency (AGNC) puts trade. We’ve been waiting to see if the stock would continue to fall after going ex-dividend last Friday – but the pullback in Treasury yields seems to have taken a lot of the downward pressure off of mortgage-based REITs.
Seeing as how AGNC seems to have found strong support at $21.25, we think it’s time for any traders who purchased the AGNC December 23 Puts to take their profits off the table. If you bought them at our recommended level of $1.25, you should be able to realize a nice profit at current levels if you haven’t already. And we expect this latest YUM puts trade to have excellent profit potential as well.
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