Yum Stock has been in my portfolio since 2009. My goal for Yum Stock is outlined in the trades info which investors can review here, but in a nutshell I am seeking income but I do not want to hold stock for more than a few months at most. For this reason every time Yum Stock gets too high I have pulled back from Put Selling at higher valuations.
If you look back through the trades for 2012 you can see that I have stayed around the $57.50 to $60.00 valuation most of the time. Once or twice I have moved to $62.50 but most of the time I have shied away from put selling above $62.50. I have been of the opinion that eventually the global slowdown would hit Yum Stock just as it did McDonalds Stock. I couldn’t see how valuations above $62.50 were justified with slowing growth.Certainly not above $70 and I had no interest in Put Selling above $70.
When a stock moves higher it needs growing earnings to support higher valuations. It also needs steady earnings to maintain a higher trading range and then once again, higher earnings to push still higher. Basically then, higher earnings pushes the stock up, then earnings remain steady at a higher level and a stock builds a new higher trading range. Eventually earnings push still higher and the stock moves up yet again. It’s a cycle that is worth being aware of because when a stock moves higher, you need to keep an eye out for earnings to meet the past quarter and continue to grind slowly higher. When higher earnings fail to materialize the stock cannot maintain higher valuations for very long. It will almost always pull back.
Yum Stock Earnings
For example below are the previous quarters of actual earnings versus estimates as well as revenue. Below are the project earnings for the upcoming quarters. Note how much higher the projections were as of Nov 29 2012 PRIOR to the announcement by Yum Brands of declining revenue. These types of earnings if they had been attained would have pushed the stock into a new trading range of probably between $65 to $75.00. This would have meant an adjustment in my Put Selling to higher strike levels. That now will probably not occur unless Yum Brands has earnings that meet or come close to the projected earnings. All of the projected earnings for Yum Brands are now being reworked by analysts.
The big drop in Yum Stock was a direct result of Yum Brands on Thursday after the markets closed announcing that they expect a decline in fourth-quarter sales at established restaurants in China, where a cooling economy is making it difficult to exceed the 21 percent gain it had there a year earlier.
Yum, which saw more than half its total revenue and operating profit for the third quarter of 2012 come from China announced they expect a 4 percent drop at most restaurants. If the revenue decline can be kept to 4% I believe Yum Stock should hold up around the $62.50 to $65.00 range with a low-end of perhaps $57.50.
This means on dips I will be back Put Selling for larger profits as the stock should stay lower than much of the past year.
Put Selling Yum Stock on Nov 30 2012
On the day after the announcement, Yum Stock plummeted as investors bailed. Here are some key aspects of the big drop on Nov 30 2012.
A. The Stock fell outside of the Lower Bollinger Band. The 10, 20 and 30 period moving averages all turned sharply lower. I do not believe the stock will quickly recover from this downturn. I do believe it will set up a new trading range.
B. Average daily volume is about 6.5 million shares. On Nov 30 2012 18.7 million shares trading hands as investors literally ran from the stock.
C. The Slow Stochastic signaled a definite downturn.
D. The Moving Average Convergence / Divergence has also signaled stock down.
The stock now is heavily oversold but it could still slip lower. The volume on Monday Dec 3 was back to normal levels but the stock closed lower than Nov 30, down almost half a percent.
The big drop pushed volatility through the roof and the market makers jumped on the chance to overcharge for puts. But as I did not need to buy any puts as I do not own stock, I was able to sell puts and I sold 10 naked puts for January 2013 $60 put strike for an excellent .70 cents. This strike is still 10% lower in the stock but it could easily make it that lower.
The volatility was huge on November 30. The next trading day Dec 3
ame puts for January on Dec 3 brought in just .43 cents today.
Yum Stock 2012 Chart
For the year, $60 would put Yum Stock back to the levels seen in January. That would definitely mark an end to the rise in Yum Stock until earnings improve again. I cannot judge if Yum Stock could fall that low by January but perhaps it could. I do know there is a lot of support at $57.50 where I have been Put Selling for a lot of this year, taking opportunities on dips to do Put Selling at $57.50.
Yum Stock Put Selling Strategy Going Forward – ideas and suggestions
For most investors, when you are Put Selling for income with no intent of owning shares you want to stay with stocks that are rising. You do not want to stay with stocks that are falling. Yum Stock though may be a bit different. It has high levels of volatility which means there is potential for Put Selling far enough out of the money to possibly warrant the risk of assignment.
As well Yum Stock pays a very good dividend and should assignment occur covered call premiums are excellent and as such this makes selling in the money covered calls to get exercised out of the stock, profitable and practical.
The volatility levels may change but for now the stock remains very volatile which keeps option premiums very attractive, but I do not plan to be Put Selling at the money. Until volatility declines to the point that option premiums are poor, I will be continuing to keep Yum Stock in my portfolio despite the announcement of a decline in earnings. If anything, this may drive up volatility more than anticipated in Yum Stock making Put Selling more profitable than in the past.
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