* Yum February $60 puts stand out
* Yum overall options volume above the norm this week
By Doris Frankel and Lisa Baertlein
CHICAGO/SAN FRANCISCO, Jan 25 Option
investors appear to have worries about Yum Brands Inc
, taking out protection against a share price decline
ahead of the fast-food chain's quarterly report early next
month, analysts say.
Prospects of slowing Chinese growth and unfavorable exchange
rates, the same headwinds that threaten rival McDonald's Corp
, are worrying investors in the fast food purveyor.
China, the world's fastest-growing major economy, is Yum's
top market for revenue and profit and the company's KFC chain is
the top Western restaurant brand there.
"Yum's option action today in all likelihood reflects the
strengthening U.S. currency market and the headwinds that might
create for corporate earnings," said Michael Yoshikami, founder
and CEO of YCMNET Advisors, whose fund owns McDonald's and
"Though China continues to be a growth engine for corporate
earnings, the slowing Chinese economy -- now at 8.5 percent
(growth) -- means that rampant Chinese growth cannot be counted
on to drive earnings even for well-positioned global companies
like Yum," he said.
A flurry of put action in Yum occurred in the aftermath of
McDonald's quarterly earnings report on Tuesday. The demand for
puts, contracts that grant investors the right to sell shares at
a fixed price any time up until expiration, continued on
Wednesday, sending Yum's options volume to above typical levels
in both sessions.
With these stocks trading near all-time highs, it is not
surprising to see shareholders either looking to protect gains
or traders making an outright bearish bet by buying
near-the-money front month put options, notably in Yum, said Dan
Nathan, a founder of riskreversal.com, a New York-based firm
specializing in options trade ideas.
"For these fast-food vendors, most of their growth comes
overseas as North American markets have matured," Nathan said.
"Both companies face significant headwinds ranging from
unfavorable exchange rates to higher input costs that could hurt
their profit margins."
Shares in both fast-food names are expensive. McDonald's
trades at about 20 times earnings, whereas Yum trades at almost
25 times earnings, said TD Ameritrade chief derivatives
strategist J.J. Kinahan.
Most of the put action in Yum was in the put conveying the
right to sell the shares at $60 apiece by February expiration.
On Wednesday, its shares closed up 38 cents at $62.65, near its
all-time high of $63.44.
"We are seeing aggressive buyers of the February $60 Yum
puts," Kinahan said. He noted that big buyers of those puts came
in on Wednesday morning and since then, the puts have been
purchased in smaller lot sizes.
"One of the reasons for the put buying in Yum may be tied to
the worries that were expressed by McDonald's on Tuesday,"
McDonald's reported unexpectedly strong December sales at
established restaurants, but its shares slipped after it said
exchange rates and other costs could take a bite out of profits
Foreign exchange boosted McDonald's earnings by 19 cents per
share in 2011 and will work against the company by roughly the
same amount in 2012, analysts said.
Yum, based in Louisville, Kentucky, has roughly 4,200
restaurants, mostly KFC outlets, in China. The company, which
also owns Pizza Hut and Taco Bell Brands, has far more
restaurants than competitors such as McDonald's and Starbucks
Corp. The company did not immediately respond to
requests for comment.
Yum and McDonald's lately have benefited from the
weak U.S. dollar, which makes U.S. goods more affordable
overseas, but that impact is likely to reverse as the dollar
strengthens versus other currencies.
China's yuan currency rose 1.5 percent against
the dollar in the fourth quarter and offshore forwards markets
are pricing in a further rise of 0.9 percent in the
coming 12 months.
The euro fell more than 3 percent against the dollar
in the fourth quarter and a Reuters poll on January 5 predicted
a further 2 percent fall in the first half of this year.
McDonald's also said that building new restaurants in China
took a bite out of margins during the fourth quarter.
"We believe this impact is temporary and remain very bullish
about the long-term potential of this market," McDonald's Chief
Financial Officer Pete Bensen said on a conference call with
analysts on Tuesday.
Overall volume in Yum options on Wednesday was three times
the average daily turnover, with about 13,000 puts and 1,715
calls traded, options analytics firm Trade Alert said. On
Tuesday, the turnover was 11.8 times normal levels, with 33,000
puts and 3,957 calls changing hands.
Yum is scheduled to report quarterly results on Feb 6.
McDonald's is also trading near its historical peak of
$102.22. The stock closed up 49 cents at $99.23.