Options Traders Score Tasty Victory With YUM Stock

YUM was flashing a "buy" signal at the time of the trade

by Patrick Martin

Published on Mar 21, 2019 at 2:54 PM

Subscribers to Schaeffer's Weekend Trader Series service recently doubled their money with the Yum! Brands, Inc. (NYSE:YUM) April 87.50 call. Here's a quick look at why we expected a big upside move from the restaurant stock, and how the profitable options trade unfolded.

When we entered the position on Monday, Dec. 10, a couple of technical floors were in place. While YUM had shown resiliency amid the broad-market sell-off, all pullbacks were contained by its 80-day moving average. Plus, despite retreating from its then record high of $93.23 on Dec. 3, the equity had found support at its +10% year-to-date gain.

Analyst sentiment toward YUM was lukewarm at best. Of the 14 brokerages covering the stock, eight maintained a "hold" rating. This left the door open for upgrades, which could draw buyers to the table.

YUM options were attractively priced at that moment, too. The stock's Schaeffer's Volatility Index (SVI) of 21% sat in the 23rd annual percentile, meaning short-term options were pricing in lower-than-usual volatility expectations. Plus, our internal quantitative data showed the combination of low implied volatilities and a high stock price had bullish implications for YUM shares in the past.

In the wake of our recommendation, YUM carved out an impressive channel of higher highs, with a January pullback neatly contained by that 80-day trendline. This was followed by a steady stream of price-target hikes. In fact, the security hit $100.93 on Friday, allowing us to close our position and lock in a 101% profit.

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