Yum stock on June 1 had a terrific down day falling from $68.43 to $64.36 for a loss of 5.9%. Yum stock fell because the news out of China indicated that their economy was showing signs of slowing which investors immediately decided would hurt Yum Stock.
June 1 was such a down day it just made sense I guess for investors to dump Yum Stock. Part of the reason for the selling was also caused by Yum Stock being unable to recapture the recent high of $74.44 from April 20. Frustration among investors was growing and all it took was a reason to sell.
I had indicated in a number of articles that by late March 2012 with the stock over $71.00 it was overvalued and would be difficult to do put selling against. I stopped put selling in March.
But I keep a chart open in my Trader’s Journal which shows the support levels in all my stocks and the resistance levels. I simply sit and wait for the next put selling opportunity to arrive.
Yum Stock Support And Resistance
Put selling against Yum Stock is easy. Below is my chart. $65.00 is the last strike I am interested in selling puts against. $60.00 is wonderful when the stock falls but $62.50 is prime put selling region. Yum Stock has been on a rise since the bear market crash in March 2009. But through the past 3 years it has risen and then traded in a range before rising again. My plotting out the range I can see the put strike prices that are best for selling against. Then it is just a matter of waiting.
With Yum Stock the $60 to $65 is the range I am presently interested in. Therefore when the stock sells off I know what put selling to do. There is no second guessing and no need to wait.
Calculating out a chart like below is simple when it comes to most blue chip stocks. It takes away all the guesswork and makes put selling and buying shares easy to do.
Put Selling Against Support in Yum Stock is easy
Put Selling Yum Stock For The Past Few Weeks
The next chart shows my put selling over the past few weeks. I commenced again on May 21 when I sold 5 naked puts for June $62.50 for .70 cents and bought 500 shares of Yum Stock for $67.65. On May 24 I sold those shares for $71.00 and on May 29 I bought to close the naked puts for . 24 cents.
On June 1 when the stock fell I went back to put selling with the big selloff. I sold the June $60.00 puts for .80 cents and the following day I bought 500 shares of Yum Stock for $63.00.
With the move back up over the past three sessions, I sold my Yum Stock today for $68.00 and closed my puts for .14 cents.
Put selling and buying shares in Yum Stock is easy because I have already charted out my strikes in advance. Then it is just a matter of waiting.
All totalled, Yum Stock over the past few weeks has returned $4735.00 against capital risked of $61,500.00 for a return of 7.7% for a few weeks work. I realize that 7.7% is nothing compared to many other stocks over this same period, but what I enjoy about a stock like Yum Stock is I never worry the entire time I am in the trade.
The Value Of A Stock Like Yum Stock
While a lot of investors love chasing hot stocks or the latest trend, I like to stay with my big blue chip stocks and as you have seen above, there is even action within these big cap stocks to provide reasonable returns.
What I like about my big cap stocks like Yum Stock is that if I am ever wrong and the stock is heading the wrong way on my trade I can always rescue the trade. Years ago when I did the hot stocks or latest flavor of the week stock, I had some great winners and big losers. When the stock I was chasing fell, it was almost impossible to rescue it without pumping in more capital. This often meant I was pumping in more capital against a stock that was already declining. Basically I was adding to my losses.
I know what you’re thinking, use a stop-loss. Well I did back then but some mornings when you wake up, a stock that was just sitting by my stop-loss suddenly opened up 4 or 5 dollars below. No stop-loss can protect against that and small cap stocks often move that much in one day in a correction.
With large caps I have never had this problem. When a stock like Yum Stock runs too high I simply move away and wait. These stocks will always come back to a normal trading range. The same when they fall too far. This makes investing and trading within large cap stocks profitable and comforting. I never worry about my trades. If for example I was in a stock like Microsoft Stock and it fell to $20.00 for some unforeseen event, it would not bother me to put more capital to work in that stock.
I know, you are probably saying to yourself that you would also put money into Microsoft Stock if it fell to $20.00. But for most investors, it is because the stock is trading above $28.00 right now and investors always say to themselves, “if only it fell I would buy it right away”. But when stock tumble big, investors run. When Microsoft fell to below $18.00 in Feb 2009 and then below $15.00 by March 2 2009, you would think volume would have been enormous as investors bought shares like mad, but that was not the case. When I put in my offers for $15.00 a share I had no trouble getting filled. There were lots of sellers.
Since I follow large caps and nothing but large caps, I watch my handful of stocks every day and eventually you will find that you get a pretty good feel for what is value and what is not. On June 1 and June 2 there was a lot of value to be had in Yum Stock and so I did put selling and bought shares.
Put Selling Big Cap Stocks Like Yum Stock During Corrections
In a correction, put selling is hard. I can easily get caught when a big cap gets hit. For example I had to roll my Microsoft Puts recently as the stock fell placing my puts in the money. But the difference is, I don’t need to worry. Yet every day I receive emails from readers asking about puts they sold that are now deep in the money. Almost all are speculative or small cap stocks and foreign stocks which I have never heard of.
What would I suggest? My biggest suggestion is to stop selling these small cap and speculative stocks. Move away from volatile ETFs and look at a handful of big cap stocks that you can chart, trade and sleep nights.
Johnson and Johnson Stock In The Last Bear Market
Among the bluest of blue chips is Johnson and Johnson stock. Do you know that Johnson and Johnson stock was trading above 71.00 in September 2008? It has yet to recover that height. Would you be worried? I’m not.
In the stock market crash in early March 2009, Johnson and Johnson stock crashed to $46.25. It lost 35.7% of its value. Yet instead of worrying I was put selling, buying shares and selling covered calls all the way down. At one point I had over $100,000 of my portfolio tied directly to Johnson and Johnson stock and held shares in a range from $52.50 to $47.50. I slept every night comfortable in knowing that my JNJ Stock trade would work out well.
My investor friends though were holding stocks like AAR, ACW, COT (which fell to $1.00 from $15.00) and hundreds of other companies. I realize that when some of these companies recovered enormous profits were made by those who bought at the bottom but unlike my Johnson and Johnson stock which returned only 25%, I slept well and my small cap investor friends developed ulcers.
Yum Stock As A Blue Chip
In September 2008, Yum Stock was trading between $36 and $39. In October 2008 it fell to $22.50 and again in March to $21.50. Just like Johnson and Johnson stock, I was put selling and buying shares. I slept well and unlike Johnson and Johnson Stock, when Yum Stock recovered I sold when it reached $60.00 for a return of 140%. So you see even blue chip stocks sometimes can provide big returns. But it isn’t so much the big return I am looking for. I am seeking consistent monthly, quarterly, semi-annual and annual gains that compound my capital each year.
So while many small caps when they recover provide incredible returns, I am quite happy with my blue chips like Yum Stock.
For interested readers this Yum Stock link will take you to Yum Brands Investor Pages