Options Update: Despite Price-Target Boost, Put Players Continue to Target Yum! Brands

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Yum! Brands, Inc. ( YUM ) scored an upgrade from Credit Suisse on Monday, as the brokerage firm raised its target for YUM from $54 to $58, while maintaining its "outperform" rating on the shares. The new target implies a 16% premium to the stock's Monday close at $50.02. What's more, Credit Suisse noted that while it sees slowing momentum for the quick service restaurant, the firm still expects 12% earnings growth from YUM in 2011.

Despite Monday's optimistic note, the brokerage bunch is actually pretty split when it comes to YUM. According to Zacks , the equity has earned eight "strong buys" and two "buy" ratings, compared to 10 tepid "holds." This configuration could leave the door open for upgrades, should other brokerage firms agree with Credit Suisse's assessment.

Meanwhile, option players are decidedly more bearish about YUM, as evidenced by the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.22, which reveals that puts comfortably outnumber calls among options in the front three months. This ratio ranks in the 96th annual percentile, pointing to near-peak levels of skepticism among short-term option players.


In the same vein, YUM's 10-day International Securities Exchange (ISE) and Chicago Board Options Exchange ( CBOE ) put/call volume ratio of 1.96 indicates that puts bought to open have nearly doubled calls purchased during the last two weeks. This ratio ranks above 92% of all other readings taken during the past 12 months, suggesting that traders on the ISE and CBOE have seldom initiated YUM puts at a faster pace.

This trend continued on Monday, with 2,566 puts changing hands on YUM -- well above the stock's expected single-session put volume of just 1,656 contracts.

YUM's December 49 put was most popular, with over 1,500 contracts traded at this strike -- the majority of which crossed at the ask price, indicating they were likely purchased. Open interest increased by 1,436 contracts overnight, confirming that new puts were added here. By buying to open the December 49 put, these traders are counting on YUM to sink below the $49 level over the next three weeks.

As a result of Monday's activity at the December 49 put, this strike now carries 1,831 contracts in open interest. Peak put open interest for the front-month series, however, can be found at the 45 strike, with 2,160 contracts in open interest. With YUM hovering right around $50, both of these puts are currently out of the money .

Technically speaking, YUM has been doing quite well lately, with the shares recently rallying to a series of all-time highs . After peaking above $52 a few weeks ago, YUM pulled back slightly, and has since been consolidating right around the $50 level. During this time, the equity's 10-week moving average has caught up with the shares, and could provide a springboard to launch YUM on the next leg of its uptrend.

Weekly Chart of YUM Since August 2010 With 10-Week Moving Average

From a contrarian perspective, the abundance of pessimism levied toward this outperforming stock can actually make for a strong bullish case. With YUM set to bounce off technical support, a reversal of sentiment from the bears -- of which there are plenty -- could help the restaurant stock continue its quest for record highs.



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This article appears in: Investing , Options

Referenced Stocks: CBOE , YUM

Schaeffer's Investment Research

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