The disappointingearnings from
Yum Brands (
, operator of Pizza Hut, Taco Bell and Kentucky Fried Chicken
restaurants, has been attributed to the slowdown in China.
The sharp pullback that began at the end of November has found
support at the $66 halfway range of the 2012 highs near $75 to lows
near $57. The strong uptrend remains intact with a 60%-plus rally
from the 2011 lows at $46 per share to the November
Filling the price gap on the charts and a breakout at the $75
peak could send prices to $84. The two-year support sits at $60,
just below the lows of the current sell-off, as a larger support to
The $84 target is more than 25% higher than current prices, but
traders who use a stock substitution strategy could make
triple-digit returns on a move to that level.
One major advantage of using longcall options rather than
buyingshares is putting up much less to control 100 shares --
that's the power ofleverage . But with all of the potential strike
andexpiration combinations, choosing anoption can be a daunting
Simply put, you want to buy a high-probability option that has
enough time to be right, so there are two rules traders should
Rule One: Choose an option with 70%-plus probability
Delta is a measurement of how well an option follows the movement
in the underlying security. It is important to buy options that pay
off from a modest price move in the stock orETF rather than those
that only make money on the infrequent price explosion.
Any trade has a 50/50 chance of success. Buyingin-the-money
options increases that probability. Delta also approximates the
odds that the optionwill bein the money at expiration. In-the-money
options are more expensive, but they're worth it, as your chances
of success are mathematically superior to buying cheap,
out-of-the-money options that rarely pay off.
For example, with YUM trading at about $66.25 at the time of
this writing, an in-the-money $57.50 strike call currently has
$8.75 in real orintrinsic value . The remainder of any premium is
thetime value of the option.
Rule Two: Buy more time until expiration than you may need
-- at least three to six months -- for the trade to develop
Time is an investor's greatestasset when you have completely
limited the exposure risks. Traders often do not buy enough time
for the trade to achieve profitable results. Nothing is more
frustrating than being right about a move only after the option has
I recommend the YUM Jan 2014 57.50 Calls at $12 or less.
A close below $60 in the stock on a weekly basis or the loss of
half of the option premium would trigger an exit. If you do not use
a stop, the maximum loss is still limited to the $1,200 or less
paid per option contract. The upside, on the other hand, is
unlimited. And the January 2014 options give thebull trend more
than a year to develop.
This trade breaks even at $69.50 ($57.50 strike plus $12 option
premium). That is a little more than $3 above YUM's current price.
If shares hit the upside breakout target of $84, then the option
would deliver a gain of more than 100%.
Action to Take -->
Buy YUM Jan 2014 57.50 Calls at $12 or less. Set stop-loss at $6.
Set initialprice target at $26.50 for a potential 121% gain in 13
This article originally appeared on TradingAuthority.com:
A Recovery in This Restaurant Stock Could be Your
Ticket to 121% Profits
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