McDonald’s Corporation (NYSE:MCD) takes center stage Wednesday morning reporting its first-quarter earnings to shareholders. The ubiquitous fast food chain is in serious need of a positive catalyst to spark a renewed advance in its stock price.
While some type of epic earnings up gap is just what MCD bulls are vying for, I’m inclined to bet on a continuation of its directionless wanderings.
Since tagging $100 for the first time in its history in late 2011, McDonalds stock has taken shareholders on a circuitous route to nowhere. On the plus side it’s been dispensing dividends along the way, but, hey, when the rest of the market is rocketing higher you can’t exactly blame MCD stock owners for griping.
The accompanying weekly chart of the Big Mac maker shows the stock’s aimless travels with serial underperformance to boot.
The unrelenting descent in the comparative relative strength recently reached fresh six-year lows.
Lackluster price action isn’t the only development sowing apathy in MCD. Activity in the options market ahead of earnings is equally uninspiring. The implied volatility for MCD options has flatlined at 20% for a month now. The customary pre-earnings volatility ramp really doesn’t manifest itself in MCD options.
But, to be fair, McDonalds isn’t exactly the world’s most exciting earnings mover either. Many of its past earnings releases have been non-events, so we’ll have to forgive spectators for their unwillingness to drive option premiums to juicier levels.
Play the MCD Range with Options
Unenthusiastic behavior notwithstanding, implied volatility is still technically perched at the 53rd percentile of its one-year range, suggesting options are priced on the high side of historical norms.
Smells like a premium selling opportunity to me.
Rather than take a stab at the direction of the post-earnings gap, let’s take the simpler, delta neutral route by selling May iron condors. Sell the May $92/$89 put spread and the May $101/$104 call spread for a total net credit of 63 cents.
Any kind of muted reaction by MCD stock should deliver profits to the condor. The maximum reward is limited to the initial 63-cent credit and will be captured if MCD can remain between $92 and $101.
The maximum risk is limited to the distance between strikes minus the net credit, or $2.57, and will be lost if MCD plummets below $89 or soars above $104.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
