Trading the Volatility Spike in YUM!


Jared Woodard Image Jared Woodard Principal, Condor Options

Yum! Brands’ surprise guidance for a sharp decline in same-store sales in China from Q4 2011 to Q4 2012, triggered a sharp sell-off last week. Jared Woodard of offers option plays for whatever direction you believe the stock might be headed.

YUM! Brands has been regarded for some time as a play on discretionary spending in China—as part of the shift from exports to domestic consumption. Given that framing, YUM investors are pretty sensitive to changes in data coming out of China. After the market close on Thursday, YUM guided lower on Q4 sales in China. Half of the operating profit in the third quarter came from China, so a forecast for a 4% drop in same-restaurant sales is a big deal.

Fig. 1. YUM! Brands price and 1-month historical volatility, 2012-06 – 2012-11. Source: Yahoo!, Condor Options
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On Friday, the stock fell almost 10%, giving up all of its gains since early October.

One-month option implied volatility (IV) rose 12.5%, and option volume was 670% of its average, trading almost half of the average daily total open interest.