After wandering aimlessly for the past six months, shares of McDonald’s Corporation (NYSE:MCD) finally decided to pick a direction. And, shareholders will be happy to note that direction was higher.
The bullish breakout did wonders in improving the structure of McDonald’s stock chart and ended a long spell of underperformance by the Dow component. Demand for MCD options also sparked, driving implied volatility to lofty levels.
Here’s an in-depth look at the most interesting developments in MCD.
- The 6% gain in Mcdonald’s stock over the past week was accompanied by a notable uptick in volume. The elevated participation amid the breakout lends validity to the move and suggests the new uptrend is likely to stick.
- The relative strength in MCD stock has been utterly atrocious for the past few years. It’s been a serial laggard unable to keep up with the strong performance of the Dow Jones Industrial Average. And yet, things may be a changin’. With this week’s rally the relative strength of MCD was able to break above a long-term downtrend line. While it remains to be seen if the budding strength can last the bulls have at least secured a foothold.
- MCD buyers didn’t just snatch up underlying shares of the fast-food chain, they also plowed into the options market. The increase in demand resulted in a notable lift in the implied volatility of MCD options. With an IV rank of 70%, MCD options volatility is higher than any other stock in the Dow Jones Industrial Average.
Capitalize on the High MCD Volatility with Condors
In the short run, MCD stock is a bit extended and perhaps due for a rest. Couple that with the relatively expensive options and neutral, short volatility plays become quite attractive. With the higher price tag of $100, iron condors are the way to go.
The iron condor is a neutral option position consisting of selling and out-of-the-money bull put and out-of-the-money bear call spread simultaneously.
Sell the Apr $95/$90 put spread and the Apr $105/$110 call spread for a net credit of $1.25 or better. The maximum reward is limited to the initial $1.25 credit and will be captured if MCD remains between $95 and $105 at April expiration. I suggest exiting early when you’ve captured 50% of maximum profit, or about 60 cents.
The maximum risk is limited to the distance between strikes minus the initial credit, or $3.75, and will be lost if MCD either falls below $90 or rises above $110.
At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.
