MCD: Super-Sized Volatility Beckons in McDonald’s Stock

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After wandering aimlessly for the past six months, shares of McDonald’s Corporation (NYSE:MCD) finally decided to pick a direction. And, shareholders will be happy to note that direction was higher.

MCD: Super-sized Volatility Beckons in McDonald's StockThe bullish breakout did wonders in improving the structure of McDonald’s stock chart and ended a long spell of underperformance by the Dow component. Demand for MCD options also sparked, driving implied volatility to lofty levels.

Here’s an in-depth look at the most interesting developments in MCD.

  1. The 6% gain in Mcdonald’s stock over the past week was accompanied by a notable uptick in volume. The elevated participation amid the breakout lends validity to the move and suggests the new uptrend is likely to stick.
  2. The relative strength in MCD stock has been utterly atrocious for the past few years. It’s been a serial laggard unable to keep up with the strong performance of the Dow Jones Industrial Average. And yet, things may be a changin’. With this week’s rally the relative strength of MCD was able to break above a long-term downtrend line. While it remains to be seen if the budding strength can last the bulls have at least secured a foothold.
  3. MCD buyers didn’t just snatch up underlying shares of the fast-food chain, they also plowed into the options market. The increase in demand resulted in a notable lift in the implied volatility of MCD options. With an IV rank of 70%, MCD options volatility is higher than any other stock in the Dow Jones Industrial Average.
MCD stock
Source: OptionsAnalytix

Capitalize on the High MCD Volatility with Condors

In the short run, MCD stock is a bit extended and perhaps due for a rest. Couple that with the relatively expensive options and neutral, short volatility plays become quite attractive. With the higher price tag of $100, iron condors are the way to go.

The iron condor is a neutral option position consisting of selling and out-of-the-money bull put and out-of-the-money bear call spread simultaneously.

Sell the Apr $95/$90 put spread and the Apr $105/$110 call spread for a net credit of $1.25 or better. The maximum reward is limited to the initial $1.25 credit and will be captured if MCD remains between $95 and $105 at April expiration. I suggest exiting early when you’ve captured 50% of maximum profit, or about 60 cents.

The maximum risk is limited to the distance between strikes minus the initial credit, or $3.75, and will be lost if MCD either falls below $90 or rises above $110.

At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/mcd-stock-mcdonalds-stock-mcd-options/.

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