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YUM! Brands Draws Bears Ahead of Earnings

Put buying part of larger trend as YUM releases results later today

by 2/4/2013 10:43 AM
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Pessimists have come out in force ahead of this afternoon's earnings release from YUM! Brands, Inc. (YUM:NYSE - 65.93), with the fast-food conglomerate drawing more than three times the number of puts last Friday than normal. YUM bears picked up about 25,000 contracts on Friday, when fewer than 7,100 were expected. The company releases earnings after the market closes today, with analysts predicting profits of 82 cents a share.

One strike investors specifically focused on during Friday's trading was the February 65 put, which saw more than 7,500 contracts cross the tape. As open interest rose by nearly 5,000 contracts over the weekend and implied volatility increased almost 3 percentage points during Friday's trading, it is likely that some of the positions were bought to open. With a volume-weighted average price (VWAP) of $1.72, breakeven for this put is $63.28, or the strike price less the premium paid, at the expiration date of Feb. 15. That would be a 4% discount off current trading levels, and this option's delta is negative 41 (or 41%), meaning the put has only a 41% chance of being in the money when the options expire.

The bearish attitude is nothing new for YUM. The stock's Schaeffer's put/call open interest ratio (SOIR) stands at 1.69, higher than all but 16% of other readings taken in the last 12 months, meaning put open interest for options expiring in three months or fewer has rarely been higher, relative to call open interest. In addition, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day put/call volume ratio of 2.15, indicating short-term investors are buying puts at more than twice the rate of calls.

YUM has recently done well on earnings day, beating analyst expectations in three out of the last four quarters. But analysts have also recently downgraded YUM, and the stock is down nearly 12% since hitting its 12-month high of $74.75 on Nov. 29.

And as an additional challenge, the company could be facing a lot of price fluctuations for poultry (specifically wings), which could impact margins at its Kentucky Fried Chicken stores.


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