As regular readers of my website know, YUM Stock is one of my favorite Put Selling stocks. Yesterday when the news came in after the market close that YUM Stock would see a drop in earnings from the China Bird Flu scare, the stock plunged after hours and then stalled around the $65 level. Today another person died from a new strain of bird flu which now amounts to 10 deaths. The latest victim was in the commercial hub of Shanghai where there are several other cases. All the cases to date have been in eastern China. The problem is the question of the strain spreading across borders. This would be even more harmful to YUM Stock and Yum earnings.
Yesterday with the volatility I sold YUM Stock naked puts at the $65 level for .38 cents which expire on Friday of this week. So why would I close today for even 3 cents when YUM Stock rose during the day and closed near the highs for the day?
YUM Stock and Weighing the Risk of Assignment
The chance of YUM Stock falling tomorrow to below $65 is pretty slim. That said for .03 cents is it worth the risk of assignment? To aid in my decision-making process I use the chart that is below with the technical tools shown. The technical chart on YUM Stock is as of today’s close. I have written many technical articles about YUM Stock. Each article over the last several months has pointed to the very strong support at $65 and I am expecting $65 to hold tomorrow. However YUM stock continues to have trouble with the 50 day simple moving average (SMA) which you can see it is still flirting with. YUM stock today touched the Lower Bollinger Band again before moving higher and YUM Stock failed to close on the highs.
Meanwhile if we look at Volume on YUM Stock you can see at Point A that Yum Stock had lots of volume at the start of February when the stock plunged on the earnings warnings. On that day, YUM stock closed well off the lows and quickly pushed back to support at $65 within 3 trading sessions. This last drop in YUM Stock has not resulted in a snap back rally. Indeed it is somewhat questionable if the last rally was overdone as the stock pushed to the $72 valuation before plunging back.
If you examine the volume, which you can see at Point B when the stock fell last week, you can see that there is no above average volume. In other words a lot of investors were not interested in the stock. Since then volume has remained poor and even today with the wide swing in stock price, volume remained about average. Investors are not to be found and the stock is trending sideways.
D. The Slow Stochastic is signaling sideways, not up or down.
E. The Ultimate Oscillator rose only slightly today but is in positive territory.
F. The Fast Stochastic is signaling that YUM Stock will move up, but only marginally.
In other words, all the indicators are showing that investors are not following the stock. This could mean any further announcement on the Chinese problems and the stock could fall back below $65. Even $64.50 would be a great price for YUM Stock but it would mean I will be rolling down my $65 puts at a time when they could have been closed for 3 cents.
YUM Stock Weighing Risk
When it comes to understanding the risk of assignment, I have seen positions that I thought were completely secure wiped out in a matter of minutes due to a change in trend or an event that I had no knowledge of. For 3 cents, whether the stock is just one day away or not, the cost is minimal to close a position that is facing a lot of issues.
I love YUM Stock and I have the naked puts to show for it, but when a stock is facing trouble and the profit has been made, I believe it is not just prudent, but smart to close a trade even just one day early for .03 cents. It is very unpleasant to find that I have to buy to close a position for a loss when a day earlier it could have been closed for mere pennies.
Everyone has different comfort zones and tolerance levels. I prefer being cautious. This trade netted .35 cents of a .38 cent trade. That means the trade returned 92% of the full trade value within one day. By using the above technical tools I can easily decide whether to close a position early for mere pennies or let it ride. Looking at the technical chart above, I believe it is not a waste of money to close yesterday’s naked puts one day before options expiry.