Since successfully scoring a Big Mac-style breakout, McDonald’s Corporation (MCD) has spent the past few weeks in digestion mode.
I doubt the narrow trading range that MCD stock finds itself in will last as long as the massive base the Golden Arches called home for four years, but it might last long enough for you to score some income on an option selling strategy.
The concept of getting paid while a stock dithers is a powerful one — one that stock traders eagerly embrace upon crossing the magical threshold welcoming equity junkies into the world of options trading. When stocks like MCD enter a go-nowhere-do-nothing trading range, it can be frustrating for stock traders as their equity buying (or shorting) strategies are rendered impotent by the stock’s sideways stubbornness.
One income-generating strategy tailor made for the current situation in MCD stock is the iron condor.
Before introducing you to my feathered friend, though, let’s take a quick glance at the price chart of ol’ Micky D’s.
Click to Enlarge
The long-term and intermediate-term trends of MCD stock are pointing soundly higher. Furthermore, with McDonald’s stock recently bursting from its multiyear prison, the bulls have momentum galore at their backs.
In the short run, however, McDonald’s stock price appears decidedly more neutral. And why shouldn’t it? The fast-food chain just scored big with its latest earnings announcement and deserves a bit of a rest to work off the overbought conditions.
If you think MCD stock will continue sideways for a spell, consider selling a December iron condor. The strategy consists of simultaneously selling a bull put and a bear call spread. And it profits as long as the underlying stay between the short strikes of either spread.
Sell the Dec $105/$100 put spread and the Dec $115/$120 call spread for a net credit of $1.20. Consider it a wager that McDonald’s stock price settles between $105 and $115 at expiration. The max reward is limited to the initial $1.20 credit. The max risk is limited to the distance between strikes minus the net credit, or $3.80, and will be lost if MCD stock rallies above $120 or falls below $100 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
