McDonald’s Corporation (MCD): McBounce or McDip?

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McDonald’s Corporation (NYSE:MCD) is a precarious stock right now. If you watch the charts, you’ll see that McDonald’s stock keeps revisiting a neckline area around $115 per share. If the neckline is decisively lost, it could invite technical sellers, and momentum could push it $10 lower.

McDonald's MCD stock chart
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In addition to MCD’s technical situation, be wary of two other factors: Markets are at all-time highs, and we face possible central bank volatility this fall.

Luckily, MCD stock has solid fundamentals and respectable management. It’s not too expensive when compared to some of the other restaurant headline stocks like Chipotle Mexican Grill, Inc. (NYSE:CMG). Also, analysts’ ratings on McDonald’s are already realistically aligned, so it doesn’t have the avalanche risk of downgrades.

Given its solid fundamentals in the long term, I am a willing buyer of McDonald’s stock at $100 per share to hold the stock … but not at $118.

How to Trade McDonald’s Stock Here

Trade #1 – The Bet: Buy the MCD Oct $108 put for 35 cents per contract. This is my max potential loss. To win, I need McDonald’s stock to fall through my put before October expiration. This would capture a potential earnings move.

I always like to reduce my out-of-pocket risk, however, so here’s a pair trade setup:

Trade #2 – The Bank: Sell the MCD Dec $100 put for 52 cents per contract. To win, I need MCD stock to stay above $100 through mid December.

Only sell naked puts if you’re willing and able to buy the stock at the strike sold. Theoretically, selling the Dec $100 put has a 90% chance of success. The risk is about 15% away from current prices — a respectable buffer. Even if MCD stock breached my strike sold, my breakeven price would be even lower since I could be profiting from the October puts I hold long.

Ideally, I want McDonald’s stock to fall through my higher put, but rebound and recover into December. If MCD falls lower than $100 while I’m still short the $100 put, I can be assigned shares at $100 apiece. This is a good example of calculated risk.

I profit from this pair trade even if MCD goes nowhere, as long as it stays above $100 per share. Any premium I collect from selling the MCD October puts is pure profit since the net of both trades is a net 17 cents credit into my account. In other words, I get paid to enter the pair trade.

I am not obliged to hold these positions through their expiration. I can close either for partial gains or losses at any time.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/mcdonalds-stock-mcd-bounce-dip/.

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