Put Selling Yum Stock has built excellent profits into my portfolio. YUM Brands earnings yesterday though hit a lot of investors hard as YUM stock this morning fell towards support at the $65 level, moving down more than 5%. At one point this morning YUM Stock broke $65 hitting $64.92. Last night I was swamped with emails from worried investors who are holding naked puts on YUM Stock or stock and covered calls. Again this morning I continue to receive emails. Investors fail to understand they need to establish a plan, clear goals and decide on strategies both to profit and protect positions before they even commence a trade. I realize I have said this repeatedly throughout many articles but it needs repeating.
Email From An Investor
Teddi: I am disheartened by the inability of YUM’s management to keep their earnings steady and rising. Do they not understand the ramifications to stock holders such as myself? I am holding naked puts at the $70 strike which expire in a week. Looking to roll out there is no premium available until into next year. I don’t want this stock any longer. Can you offer me some suggestions to get out of this mess. Why does this kind of event happen when I am careful with the stocks I pick. You love YUM Stock so I thought if anyone can help it would be you. I am tired of this stupid trades. I win at some and then along comes Yum and I lose big. Thanks.
Bruce
All the emails I have received are telling me the same thing – namely no plan, no goal, no strategy to profit and protect.
But among all the emails I also received encouraging ones. Consider this email I received this morning.
Thanks so much for everything you do. I am a member and I have printed out all your strategies and paper trade many of them. I have my Teddi binder. I want to brag to you about my Yum Stock trades. I sold 25 naked puts in YUM Stock at $70 strike for excellent premiums just a short while back. Yesterday I did your straddle for 10 contracts on both sides. From another one of your articles I followed one of your protective strategies for handling earnings on volatile stocks. I bought 15 puts for Oct 19 at the $67.50 put. That turned part of my naked put trade into a spread. This morning I am lovin’ this drop. I unwound my straddle for huge gains and I have sold my naked puts at the $67.50 strike for what you call “stellar” returns. On the next bounce I will be rolling my $70 put strikes but I am going to be using your strategy of rolling out some of the puts at the same strike and then down with other puts. You keep telling us, plan, plan, plan. I am emailing to tell you it works, works works. I tipped your jar. The best article I have read in years was your article on running your investing like a business. Your writing and site has changed my outlook on investing forever. No more losses Teddi, just gains. Thank you for fullyinforming me.
Clark
Learn From Failure – Don’t Repeat The Mistakes
These two sharply contrasting emails are representative of the ones I have been getting yesterday and today. One investor is disheartened and the other delighted. One planned, and the other did not.
For Bruce I would say having a plan and goal in place and the strategy for both the profit and a possible rescue, makes it easy to invest and stay profitable. Bruce is looking at this as “you must roll now”. Instead look at the support levels in the stock and volume. Realize that there will be other opportunities and many different ways to apply a strategy to this trade. Why simply roll out on a day like today?
Mistakes Made – Learn Support Levels
Instead take time to consider what went wrong with the original trade to learn and not repeat the mistake. The first thing obviously was the $70 put strike was too far away from support at $65. What could Bruce have done differently if he wanted the premiums the $70 put strike offered. Perhaps Bruce will see that a put credit spread is better when trading away from support levels.
Do You Really Want The Stock?
When Put Selling against stocks, investors always tell themselves they would own this stock if it fell and they were assigned. Really? Ask yourself, if YUM Stock fell back to longer term support at $60.00 would you own it at $70? Now ask yourself why do you not have a plan to take your options all the way back to $60. Don’t be unkind to your portfolio by believing you would own what you are Put Selling against. Instead look at the charts and consider where your stock could be heading. Then consider would you want to own the stock. If not, then do your Put Selling at put strikes below support levels. Don’t sell puts during earnings periods. Sell puts only on dips when stocks are climbing and refrain from Put Selling a declining stock or when stocks in general are declining. Also realize that your portfolio returns will not be the same as selling puts closer or even above support levels, but you are better protected. Understand that the more conservative the strategy, the lower the profits but the higher the protection.
Look For A Recovery In Yum Stock
What about a recovery in YUM stock? Will there be a recovery? Is this stock simply going to collapse? For some clues Bruce should study past drops in YUM Stock from previous earnings disappointment and there have been many. Note the recovery levels. Then consider a recovery of just 50% of previous drops. What does that mean for the stock. It would appear based on previous bounces that YUM Stock could recover to $68 to $69. That means there is a good chance for a roll out at that time. If that does not happen for 3 weeks what are the plans as this is an Oct 19 options expiry at the $70 put strike? Would it be to roll out just one more week for no profit but for a chance to get out of the trade at a later date?
Yum Stock Three Years Of Pullbacks
Below is YUM Stock over the last 3 years in a weekly time frame. There have been 7 major pullbacks in the stock and 6 recoveries. The recoveries have been as pronounced as the pullbacks. This means if the next recovery in the stock is even 50% of the previous recoveries, the stock has a good chance to recover to the $68 to $69 range.
Consider An Intraday Roll Out
What about an intraday roll out? Have you considered using technical tools to help time buying back the $70 naked puts and then those same tools for rolling them out at the same strike for a small profit while waiting for a recovery?
Plan and Act
Once you decide on a course of action ask yourself what was your plan if the stock fell quickly. Did you have a plan? Most investors don’t. Everyone knew YUM earnings could be bad. Analysts kept downgrading their earnings and revenue outlook over the past 2 months. What was your plan with your trade? As Clark shows there are many ways to profit and protect a position even after the original placement of the trade. Ask yourself why you did not act. Then decide how you will react differently in the future for trades.
Trades Fail – That’s Part Of Investing
Part of investing is failing trades. This is why decades ago when I was mentored we spent months studying repair and rescue strategies. Without a plan I was constantly looking at winning trades and then failing ones. It became evident immediately that winning trades take care of themselves, but failing trades damage my portfolio and take time and energy to recover from.
No stock goes up forever. But by using rescue or repair strategies that kept my trade profitable I found that not only my portfolio grew even if only slightly, but my outlook as an investor was stronger and I was better prepared for the next failure. Each year I found the number of failures grew less until eventually they rarely happened at all. Losing trades are part of investing and by having rescue strategies in place to deal with them I became a better investor. I learned how to stay profitable despite the outcome of the trade itself.
I short I found it is how you handle the failures that advises you whether you should be investing in risky assets or move to very conservative strategies such as T-Bills for 30 or 90 days. They pay next to nothing but they offer security of principal. Investing through stocks and options is definitely not for everyone.
If you find you learn from mistakes, do not repeat them, learn to plan and can protect and grow your portfolio in any environment then you are meant to be a do it yourself investor.
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