One of the most popular stocks people enter into their stock options watchlist at Stock Options Channel is McDonald’s (MCD). So this week we highlight one interesting put contract, and one interesting call contract, from the July expiration for MCD.
The put contract our YieldBoost algorithm identified as particularly interesting, is at the $100 strike, which has a bid at the time of this writing of 82 cents. Collecting that bid as the premium represents a 0.8% return against the $100 commitment, or a 8.1% annualized rate of return (at Stock Options Channel we call this the YieldBoost).
Selling a put does not give an investor access to MCD’s upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. So unless MCD stock declines 2.8% and the contract is exercised (resulting in a cost basis of $99.18 per share before broker commissions, subtracting the 82 cents from $100), the only upside to the put seller is from collecting that premium for the 8.1% annualized rate of return.
Interestingly, that annualized 8.1% figure actually exceeds the 3.2% annualized dividend paid by McDonald’s Corp by 4.9 percentage points, based on the current share price of $102.67. And yet, if an investor were to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to lose 2.75% to reach the $100 strike price.
Always important when discussing dividends is the fact that, in general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company. In the case of McDonald’s, looking at the dividend history chart for MCD below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 3.2% annualized dividend yield.
Turning to the other side of the option chain, we highlight one call contract of particular interest for the July expiration, for shareholders of McDonald’s Corp looking to boost their income beyond the stock’s 3.2% annualized dividend yield. Selling the covered call at the $103 strike and collecting the premium based on the $1.21 bid annualizes to an additional 11.6% rate of return against the current stock price (this is what we at Stock Options Channel refer to as the YieldBoost), for a total of 14.8% annualized rate in the scenario where the stock is not called away. Any upside above $103 would be lost if the stock rises there and is called away, but MCD shares would have to advance 0.2% from current levels for that to occur, meaning that in the scenario where the stock is called, the shareholder has earned a 1.3% return from this trading level, in addition to any dividends collected before the stock was called.
The chart below shows the trailing 12-month trading history for McDonald’s, highlighting in green where the $100 strike is located relative to that history, and highlighting the $103 strike in red:
The chart above, and the stock’s historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the July put or call options highlighted in this article deliver a rate of return that represents good reward for the risks. We calculate the trailing 12-month volatility for McDonald’s (considering the last 251 trading day MCD historical stock prices using closing values, as well as today’s price of $102.67) to be 12%.
In mid-afternoon trading on Tuesday, the put volume among S&P 500 components was 1.17M contracts, with call volume at 2.28M, for a put:call ratio of 0.51 so far for the day. Compared to the long-term median put:call ratio of 0.65, that represents very high call volume relative to puts. In other words, buyers preferred calls in options trading on Tuesday.