After floundering for months, McDonald’s (MCD) appears to have found its footing, and a potentially lucrative breakout is in the offing.
Today, the ubiquitous golden arches stand for money.
The MCD stock price has been locked in a trading range for virtually the entire year. Its inability to trend higher or lower isn’t for lack of trying, though. I count no less than seven attempts at breaking through the lower bound and three major attempts at breaching resistance.
The fourth such bid by McDonald’s to break resistance is transpiring as we speak. And I have a feeling this one will succeed.
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For starters, the price action in MCD has been much more constructive over the past month. A clean series of higher pivot highs and higher pivot lows has taken root, creating quite the textbook uptrend. High-volume down days have disappeared, and the rest of the market is showing a bit more strength in recent days.
Should MCD stock clear resistance at $101, the next major ceiling overhead stands at $104 (previous highs hit in 2014 and 2013), so that’s a logical target for this breakout play.
Order a Call Spread on MCD Stock
A simple approach would be to buy the Oct $100 calls for $2.90. But, since MCD’s stock price may have trouble getting above the aforementioned $104 resistance level, let’s sell the Oct $105 calls for $1 to partially finance the trade. This will reduce the overall risk should things turn sour.
Buy the Oct $100/$105 call spread for $1.90 net debit or better. The max risk is limited to the initial debit of $1.90 and will be lost if MCD stock sits below $100 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $3.10, and will be captured if MCD stock price can rise above $105 by Oct expiration.
By risking $1.90 to capture $3.10, the call spread offers a potential return on investment of 163%.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
