With Monday’s bear market collapse I am glad to welcome YUM Stock back to my US Portfolio. As long term readers might recall, in May of this year I sold puts on YUM stock and when they expired I indicated that YUM was over valued in my opinion and I would discontinue selling puts until the stock pulled back. Well the stock has fallen over the past sessions and with today’s market collapse it is below $50.00.
This makes for an excellent put trade and with volatility almost at 50.00 today on the VIX, the put premiums are terrific.
Below is the YUM Stock chart as of today.
With the decline of YUM Stock from its recent high of $57.75 on July 14, the stock has declined steadily back down to $47.77 today. This marks an incredible 17.28% plunge for Yum Stock.
The decision now has to be what YUM Option put strike to sell. With the market plummeting day after day I have to wonder when the market will turn back up. Even a bounce would be nice at this point to stop the panic of sellers. In this environment the stock could fall even further.
YUM STOCK – Picking The YUM Option Put Strike
To decide what level to sell the YUM Stock put option strike at I go back to the 1 year chart. As I believe the market in the short term may head back to the lows of this year and then possibly the lows of next year, I can see that this year (2011) low is $46.27 which was set on Jan 28. If I look at the year 2010, I can see that in the fall the stock held at the $46.00 price level.
If I can sell the $45 strike out to just September, I probably have a pretty good chance to not be assigned. There should be a lot of support in YUM Stock at the $46.00 level. If the stock falls to $45.00 and I am assigned, my cost basis in the stock is just $20.45 due to the capital I have earned over the past two years.
YUM STOCK – SUMMARY
The $45 strike was easy to sell at the close today. With the Dow down more than 600 points and volatility almost at 50, the YUM Option for September $45 put was $1.25. This was a great trade, with great premiums. Looking back at the past year of selling put options in YUM stock, I spent the year selling between the $46 to $50 strikes. With this bear market, I can enjoy selling below the $46 strike! So while other investors hate volatility, I look forward to it. You can view today’s YUM Stock put option trade here.