McDonald’s Corporation (MCD) stock watchers reticent to chase the golden arches will be happy to know old Ronnie McDonald is setting up a nice little dip buying opportunity for them.
As mentioned in “McDonald’s Earnings Send MCD Stock to New Heights” MCD scored big on its latest earnings announcement, sending instant happy meals to shareholders of all stripes.
MCD stock is standing tall amid a sea of mediocrity, bearishness and blah. It has been an outright leader of the Dow components for the past six months, reaching a new all-time high in the last week.
But chasing overbought stocks is always a tricky endeavor. The risk-reward is asymmetrically skewed in favor of bears. As a result, onlookers typically await a pullback — a bout of profit taking — to take the stock price down a notch or two, thereby creating a lower risk entry.
MCD fans need wait no longer. The fast food kingpin has obliged. McDonald’s stock is down close to 5% in recent days, providing a potential buying opportunity. The volume accompanying the retracement has been tame, suggesting run-of-the-mill profit taking driving the dip instead of major institutional selling.
And that’s a good thing.
Both the 20-day and 50-day moving average are looming close. These twin averages provide as logical a spot as any for dip buyers to put their money to work. Should signs of buying materialize in the coming days, consider jumping aboard MCD stock.
MCD Call Spreads Beckon
Implied volatility for MCD options sits in the middle of its one-year range. With options neither cheap nor expensive, buying call vertical spreads is the way to go.
Buy the April $120/$125 call spread for $2 or less. The max loss is limited to the initial $2 debit and will be forfeited if McDonald’s stock price sits below $120 at April expiration.
The max gain is limited to the distance between strikes minus the net debit, or $3, and will be captured if MCD stock can rise above $125 by April expiration.
By using April options, we give McDonald’s two months to simply return to where it was just last week. Should the uptrend continue, the stock should have no problem making such a move.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
