Trade Adjustment – a look at YUM Brands

I put a Risk Reversal trade on for $YUM on 12/3 (here are some notes from my Trading Journal :

p/b buy, waited over the weekend; S Dec 65 Put at .70 on 12/3 (1/3), then (1/6); S Jan 62.5 Put at .70 & L the 70/72.5 CS for .03 credit (1.27/.60); BtC Dec 65 Put for .87 for -$.17 on 12/4 (1/2 pos);

Let’s break down this down a bit.

  • p/b = pullback
  • Dec = December
  • S = Short
  • L = Long
  • CS = Call Spread
  • Jan = January
  • BtC = Buy to Close
  • pos = position

Here are the steps taken in each trade:

  1. short the Dec 65 Put at $.70 on 12/3 (a 1/3 size position)
  2. short more Dec 65 Put at $.70 on 12/3 (a 1/6 position, bringing total to a 1/2 pos)
  3. then later in the day, short the January 62.5 Put at $.70
  4. long the 70/72.5 Call Spread at a $.03 credit
  5. today I kept a watchful eye on the position as it continued to drift down. I put on a very tight leash and ultimately bought the short December 65 Put back for a small loss.

So why would I do that, this step #5? For me, I focus on keeping the losses small – as much as possible. An advantage I have here is that the rest of the trade is in January so I have time on my side, as well as a lot of flexibility to sell more premium to cover the cost of the Call Spread.

One additional note here is this: If I believe that price will continue to drift down, then I focus on being patient and looking for a firmer “floor” in price. Once I see that occur, the following potential scenarios exist:

  • Sell the December 62.5 Puts (1/2 pos)
  • Sell more January 62.5 Puts. Possibility here is that I can sell less (or undersell) the Puts to cover the cost of the upside Call Spread. What a deal.
  • Sell the January 60 Puts if price keeps drifting down

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