Exploring Options Strategies for Investing in Yum! Brands

Investors interested in Yum! Brands Inc (Symbol: YUM) may explore selling puts to gain exposure while avoiding the current market price of $147.17 per share. An intriguing option is the January 2027 put contract at the $120 strike, which currently bids at $5.30. This premium offers a 4.4% return against the $120 commitment, equating to a 2.6% annualized rate of return.

Selling a put contract differs from owning shares, as it limits exposure to potential gains. The put seller acquires the shares only if the buyer exercises the option. The buyer would exercise the contract only if it offers a better outcome than selling at the market price. Therefore, unless Yum! Brands Inc shares decline by 18.4%, resulting in an effective cost basis of $114.70 per share (after accounting for the $5.30 premium), the primary benefit for the put seller lies in collecting the premium for the 2.6% annualized return.

Comparative Analysis of Dividends and Returns

Notably, the 2.6% annualized return from the put contract surpasses the current 1.9% annualized dividend yield based on Yum! Brands’ share price of $147.17. If an investor opts to purchase shares to benefit from the dividend, they face a higher risk, as the stock would need to decrease by 18.36% to reach the $120 strike price.

When examining dividends, it’s essential to understand their unpredictability, often fluctuating with the company’s profitability. Evaluating Yum! Brands Inc’s dividend history can assist in assessing the likelihood of continued dividends and whether a 1.9% annualized yield is reasonable.

Historical Performance and Option Insights

The trailing twelve-month trading history for Yum! Brands Inc reveals critical information about the $120 strike location relative to past performance:

Using this chart alongside Yum! Brands’ historical volatility aids in determining whether selling the January 2027 put at the $120 strike for a 2.6% annualized return is an appropriate risk-reward scenario. The trailing twelve-month volatility for Yum! Brands Inc, calculated from the last 250 trading days and today’s price of $147.17, stands at 22%.

On Tuesday afternoon, the put volume among S&P 500 components was 775,332 contracts, matching call volume at the same level, resulting in a put-to-call ratio of 0.73. This figure indicates a higher-than-normal level of put buying compared to the long-term median ratio of 0.65, suggesting increased bearish sentiment among options traders.

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Further Insights:

• IPOs
• CAS Options Chain
• Institutional Holders of VRNS

The views and opinions expressed herein are the author’s and do not necessarily reflect those of Nasdaq, Inc.