Stocks quoted in this article:
Yum! Brands, Inc. (NYSE:YUM) took a hit this morning, when it was revealed that one of its suppliers in China was providing the restaurant operator with expired meat. That embarrassment was followed by a price-target cut to $84 from $87 at Baird. As such, YUM shares are down 3.8% to trade at $74.47, and options traders are gravitating toward puts over calls.
Specifically, puts are trading at five times the usual intraday pace, narrowly outstripping the rate of calls. What's more, YUM's 30-day at-the-money implied volatility has jumped 9.2% to 17.1%, signaling strong demand for short-term options.
The most active short-term bet is the restaurateur's weekly 7/25 74.50-strike put, where nearly 2,100 contracts are on the tape. The majority of these in-the-money puts are being bought to open at a volume-weighted average price (VWAP) of $0.57, as traders bank on extended downside in the stock through the end of the week, when the contracts expire. To profit at this Friday's close, when the weekly puts cease trading, Yum! Brands, Inc. (NYSE:YUM) must descend below $73.93 (strike less VWAP), with gains accruing on a move all the way down to zero. By contrast, the most the buyers stand to lose is the initial premium paid, should the equity finish this week above the strike.