logo
  Join        Login             Stock Quote

Trading The Volatility Spike In YUM! Brands

 December 03, 2012 09:07 AM
 


YUM! Brands has been regarded for some time as a play on discretionary spending in China – as part of the shift from exports to domestic consumption. Given that framing, YUM investors are pretty sensitive to changes in data coming out of China. After the market close on Thursday, YUM guided lower on Q4 sales in China. Half of the operating profit in the third quarter came from China, so a forecast for a 4% drop in same-restaurant sales is a big deal.

[Related -Yum! Brands, Inc.(NYSE:YUM): An Attractive Stock To Own Given Potential EPS Growth]

Fig. 1. YUM! Brands price and 1-month historical volatility, 2012-06 – 2012-11. Source: Yahoo!, Condor Options

On Friday, the stock fell almost 10%, giving up all of its gains since early October.

One month option implied volatility (IV) rose 12.5%, and option volume was 670% of its average, trading almost half of the average daily total open interest. Traders were net buyers of premium with a negative directional bias – in other words, there wasn't a contrarian tone to the activity. 

The most interesting aspect of options activity on Friday was the way markets treated the price action as a one-off event. As shown in the lower panel of fig. 1, the 1-month historical volatility of the stock jumped to 40% because of the day's price drop. While option implied volatility also rose, the response was more muted. December 70 puts, which traded at about 26% implied volatility at Thursday's close, were priced at 29.7% implied volatility to end Friday. The reaction in January options was even less extreme.

[Related -Yum! Brands, Inc. (YUM): What To Watch At China Investor Day]

Further confirming the expectation that today's price movement was a one-time adjustment, option IV skew actually declined slightly. The ratio of January 90% put IV to ATM IV on Thursday was about 1.17; on Friday, the same ratio was 1.10.

Investors may not be eager to buy shares right away: if the stock's drop at the end of the week and month causes managers with large holdings to trim their positions, there could be more downside price action to come. Instead of buying stock at $67, traders can sell the January 62.5 puts for $0.85 and buy the 57.5 puts for $0.25 to limit downside risk. The vertical spread will make a 13% return on capital risked if the stock is at or above $62.50 at January expiration.

If positive economic data from China continues trickling in and YUM rallies in the short-term, investors can take advantage of the expected drop in IV and take profits instead of holding the position until expiration.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article image3 US Updates Show Ongoing Growth

Three economic updates today provide more evidence that moderate growth endures for the US. The numbers du read on...

article imageBuy These Solar Stocks Before They Snapback

Sometimes the market hands you a gift. And it would be foolish not to take it. Thanks to general market read on...

article imageInvestors Are Even More Euphoric And Confident.

As noted on the blog last Thursday, even though the market had been down for three straight weeks, last read on...

article imageThe Butterfly Machine

There’s a phenomenon called the Butterfly Effect. One common quotation is “It has been said that something read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.