Taco Bell Delivers, But Can Yum! Brands, Inc. (YUM) Earnings?

Taco Bell is testing delivery, but Yum! Brands, Inc. (YUM) shareholders and option traders seem unimpressed

Jul 8, 2015 at 12:02 PM
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Dinner options for the weary (or "couch potatoes," as my mother might say) are no longer limited to pizza and Chinese, that's for sure. Just this year, Chipotle Mexican Grill, Inc. (NYSE:CMG) and McDonald's Corporation (NYSE:MCD) announced food-delivery experiments, Amazon.com, Inc. (NASDAQ:AMZN) started dipping its toes in the grocery delivery game, and Kroger Co (NYSE:KR) started testing a "click and collect" online shopping option. Now, Taco Bell is throwing its hat in the ring, but judging by the shares of parent Yum! Brands, Inc. (NYSE:YUM), speculators aren't enthused.

Amid a global sell-off -- and an apparent glitch-triggered suspension of NYSE trading -- YUM is down 3.9% at $86.36, and is on pace to end the week south of its 10-week moving average for the just the second time since late January.  Furthermore, YUM has breached support at $90, which provided a round-number stool since early May, and helped the security to an all-time peak of $95.90 on May 20. The shares are now testing a foothold atop their 20-week trendline, which has ascended into the $86 neighborhood.


In the options pits, puts are running at seven times the average intraday pace, with buy-to-open action spotted at the August 85 strike. By purchasing the contracts to open, the buyers expect YUM to sink beneath $85 by the close on Friday, Aug. 21, when the contracts expire.

What's more, short-term traders are paying a pretty penny for YUM contracts ahead of the company's turn in the earnings spotlight next Tuesday, July 14. The equity's 30-day at-the-money (ATM) implied volatility sits at 35.1%, and its Schaeffer's Volatility Index (SVI) rests at 43% -- both in the 100th percentile of their annual range, suggesting YUM's near-term options are historically expensive right now.

Prior to today, though, calls were the options of choice. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day call/put volume ratio sits at 2.01. Furthermore, this ratio registers in the 69th percentile of its annual range, hinting at a healthier-than-usual appetite for bullish bets over bearish during the past 10 weeks. 

Traders were likely betting on a rally to higher highs for YUM in the short term, as the August 90-, 92.50-, and 100-strike calls saw the biggest open interest increases. In fact, calls expiring before Aug. 21 account for seven of the 10 most popular initiations of the past 10 sessions. 

Historically, a post-earnings rally would be par for the course for Yum! Brands, Inc. (NYSE:YUM). The stock has enjoyed a single-session post-earnings gain in the last three quarters. Over the past eight quarters, YUM has averaged a move of 4% in the session after reporting, and judging by the stock's near-term ATM straddle, option traders this go-round are pricing in a 6.2% move in either direction.


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