Fans of Mickey D’s finally have something to cheer about. After being relegated to a range-bound prison for almost four years, shares of McDonalds (MCD) have finally broken free.
And boy was the breakout epic.
Shareholders have a stellar earnings announcement to thank as the catalyst for the long awaited resolution.
Last Thursday, MCD stock reported an impressive $1.40 earnings per share versus $1.09 from a year ago. Analyst expectations heading into the event were for $1.27 per share, so McDonald’s bested estimates handily.
The post-earnings rally tacked on 10% to McDonald’s stock price driving the ubiquitous fast food chain to a new record high at $112.63. On the technical front, MCD is now firing on all cylinders. As technicians like to say, “the longer the base, the higher in space.” Given that MCD has been building its base (between $85 and $103) for just under four years, it’s no wonder the breakout was such a spectacle.
The relative performance of MCD stock has also turned a corner in recent months. After underperforming the Dow Jones Industrial Average for multiple years, MCD stock finally changed its stripes turning from laggard to leader. With last week’s breakout, the relative strength in MCD reached a new 16-year high.
Two Tasty Trades for MCD Stock
Here are a pair trades sure to deliver up a happy meal of profits to interested spectators: one for bulls and one for bears.
While the recent rally has been a sight to behold, the MCD stock price is looking a bit extended. McDonald’s bears looking for a pullback in the coming days could take advantage of its lofty perch by selling call spreads. Consider waiting for some type of bearish reversal candle to materialize in MCD before pulling the trigger.
Sell the Nov $118/$125 call spread for 65 cents credit. The reward is limited to the initial 65 cent credit and will be captured if McDonald’s stock price can remain below $118 for the next 25 days. The max risk is limited to the distance between strikes minus the net credit, or $6.35, and will be lost if MCD stock defies gravity by rallying north of $125. You can drastically cut the risk by simply exiting if MCD rises above the short strike of $118.
MCD bulls leery of chasing the stock here should be waiting in the wings to pounce on any type of pullback. I suspect the $100 to $105 zone to provide major support on any kind of retest. Watch the Dec $100/$95 put spread in the coming days. If a drop in MCD rises the price of the put spread to at least 50 cents, sell it to enter a bull put spread.
The max reward will be 50 cents and can be captured if McDonald’s stock price remains above $100 by expiration. The max risk is limited to the distance between strikes minus 50 cents, or $4.50, and will be lost if MCD tumbles below $95, which is highly unlikely.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
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