Yum stock price on Friday closed at $64.95. I was holding 10 July $57.50 YUM Stock naked puts which expired. YUM Stock has been a star performer this year despite my having suspended Put Selling in mid-March and not resuming until May. During the mid-March to May period I felt YUM Stock was overvalued based on studying support and resistance charts for YUM Stock. You can view all my 2012 YUM Stock trades here.
Investor Concern Drives Up Put Options Premiums
When YUM stock ran up over $70 in April, it quickly topped out and pulled back. Investors are concerned that the slow down underway in Asia and particularly China may hurt Yum Brands earnings and therefore the price of YUM Stock. Few investors want to take any chances which means YUM Stock is drifting in a narrow range while investors make up their minds as to where YUM stock is headed.
Investor concern has led to heightened volatility in YUM Stock which is excellent for inflating options premiums. In particular Put Selling has improved dramatically for out of the money puts. Interestingly, put premiums have been higher than call premiums for potentially the same out of the money strikes, which shows the downward bias on the part of the market makers for YUM Stock.In other words even market makers are concerned that YUM Stock could fall a lot further than where it is today.
Put Selling Yum Stock Means Bigger Profits
Over the past couple of years I have had a lot of emails from readers wondering if I could walk them through the decision-making process I use when Put Selling. As well many investors have asked me where would I suggest they start to learn and engage in Put Selling with their own capital.
Put Selling Steps
To begin to learn how to engage in Put Selling as an investment strategy you want to take the 4 following steps. These are the short steps I take to decide what Put Selling strategies to apply to a stock. I use these steps each weekend after an options expiry Friday. I thought YUM Stock would be a good example to follow for these Trading Options strategies since all options are now expired on Yum Stock and you can see the steps I take and how I establish the strategies I will be using next month.
Step 1: Review YUM Stock Support And Resistance
By doing a little Stock Technical Analysis in advance of engaging in Put Selling, I can almost always set up a strategy that will consistently provide profits and know in advance how I would rescue any YUM Stock Put Selling trades that end up in the money and at risk of assignment of shares.
Therefore the first step in deciding what the next strategy for trading options on YUM Stock will be, is to pull out the most recent Support and Resistance chart for YUM stock.
In the YUM Stock chart below you can see that there is weak support at $62.50 to $65.00 over the past year. But just like the Intel Stock article I wrote yesterday, the very best Put Selling premiums are always found at the money put strikes. The dilemma then is how to best continue Put Selling YUM Stock but in a defensive manner. I never mind rolling options when it is needed but I would prefer not rolling put options but have them continually expire if possible. Rolling Options is a good strategy and can consistently provide profits if done properly. However never having to buy back naked puts but keep put selling will of course bring in the highest returns.
Step 2: Stock Technical Analysis
Next up is a quick look at the stock technical analysis picture on YUM Stock. You can usually pick whichever stock technical indicators you prefer but I would always have the Slow Stochastic and Fast Stochastic present.
The Slow Stochastic looks out more than a few days while the Fast Stochastic is one or two days at most. By using both stock technical analysis tools I can get a good readings as to what to expect over the next week.
For example, in YUM Stock the Slow Stochastic is evenly split with %K at 76.53 and %D at 77.81. This reading tells me that YUM Stock is stuck in a narrow trading range for at least the next few days to a week. With a reading this close it is obvious that investors are undecided about YUM Stock.
The Fast Stochastic is %K 60.47 and %D at 76.53. With %D giving a higher reading than %K, the trend is for the stock to remain under pressure and possibly move lower, which would be very beneficial to my put selling strategies.
Stock Technical Analysis then provides information on YUM Stock’s trend. While never perfect, it is a good gauge to use to assist in making put selling decisions. If the stock is advancing, put option premiums that are out of the money will be declining. But if YUM Stock is declining put option premiums will be higher.
By using Support and Resistance I know what strikes to consider for Put Selling. By using Stock Technical Analysis I can gauge the overall stock trend for the moment.
Step 3: Decide In Advance of Trading Options, Do I Want YUM Stock
It is essential to decide in advance of Trading Options what kind of options investment you want to take with YUM Stock.
For example if you want to own YUM Stock long-term then you will want to make a strategy decision based on long-term ownership.
On the other hand perhaps you want to own YUM Stock down the road and not today. Then you don’t care about Put Selling without a protective put to guard against a severe decline in the underlying stock. You are seeking to make as much income as possible and are prepared to eventually accept assignment of the stock.
Perhaps you are like me and have no interest in ever owning shares of YUM Stock. If this is the case then selling in the money puts makes absolutely no sense while selling out of the money puts makes a lot of sense if done on the basis of the Support and Resistance chart from Step 1 above.
The above are only three styles of investing in any stock. You must decide in advance of trading options, what type of investor you are or plan to be for the stock you have chosen for put selling.
Step 4: Pick An Investment Strategy
Once an investor has gone through Steps 1 to 3 they are ready to pick a strategy which is step 4.
I realize that a lot of readers have only limited knowledge of various put selling strategies so Step 4 may be more difficult for them. For myself I can immediately see by looking at the support and resistance chart from Step 1 and the stock technical analysis in Step 2, that YUM Stock will remain under pressure. This is perfect for a variety of strategies. These include everything from buying and selling the stock under the right conditions, to a credit put spread, to selling naked puts outright with no downside protective put or perhaps consider selling a number of put strikes each at a lower strike and further out in time. This provides excellent income and protection.
My YUM Stock Put Selling Strategies
For myself, I plan to stay between $60 and $55 for downside put strikes. In answer to Question 3 above, I have no intention of owning the stock long-term, but I do not mind being assigned shares, albeit at valuations lower than where it is today ($64.95). Therefore put selling YUM Stock without a protective put is my choice for moving ahead with more YUM Stock put selling.
I will also use a buy and sell strategy when the stock has a solid down day. Through using stock technical analysis I will do my best to time when to buy and then sell my YUM Stock.
YUM Stock Put Selling Summary
These simple steps are all I need when it comes to deciding what put strikes to consider for my put selling of YUM Stock. In my case I will be selling the $60.00 and $57.50 naked puts in YUM Stock on weakness, but I will be doing it in small groups. I will explain this in the next YUM Stock Put Selling article.