So far, this is has been an underwhelming learning season as companies have been reporting strong quarters but traders have been hesitant to buy the stocks much higher. Generally speaking the reactions have been positive but temporary lacking follow through.
We’ve been trading scary global headlines since early February, so investors are scared of a multitude of headlines — but mostly of tariff wars that could be coming in the next few weeks. I personally believe that cooler heads will prevail leaving fundamentals to win over headline fears in quality stocks.
This morning McDonald’s Corporation (NYSE:MCD) reported a strong earnings beat on all metrics. They had a Little help from tax and currency impacts but none the less they still beat on comparable sales especially overseas. For restaurants, it is most important to be able to turn better sales numbers than in the prior year.
MCD is a global brand and hardly anyone on the planet doesn’t recognize the golden arches. The company is well-managed so I am confident they will be able to navigate any macro environment that lays ahead. And we are still in a growing global cycle. So there’s no reason for McDonald’s stock to correct on its own. And therein lies my opportunity.
MCD stock is spiking this morning which is exciting. But we’ve seen colossal head fakes in the past two weeks. So caution is warranted when chasing an upside earnings move.
Fundamentally, McDonalds is not expensive from a price-to-earnings ratio barely over 20 for the trailing-12-month period. But this is not the type of stock that encourages long runs. So I am more comfortable betting on downside support holding rather than chasing upside runaway rallies.
MCD has had two 10% corrections in the last few months. One came with the general markets on February second but the second one came more recently in early March. Now it has since recovered quite a bit but it’s obvious that the price zone around $160 per share is pivotal for the stock.
Click to Enlarge Often enough, pivot points usually provide support when prices are falling. They also offer a good base from which the bulls can mount another move higher. This morning’s upside reaction to earnings could be one of those rallies.
This week is full of macroeconomic reasons to move equity prices, but we don’t know in which direction so caution is warranted and I prefer to have some room for error. If I buy MCD stock at $164 per share, that leaves me with absolutely no room to spare. If the price falls, I start losing money immediately. So instead, I will use MCD options where I can build myself a healthy buffer between current price and my level of risk.
Experts on Wall Street agree that there is more upside potential for McDonald’s. It is now trading at the low end of their price target. This reduces the chance of surprise downgrades, especially now that they delivered a report that was better than expected on all counts.
MCD Stock Trade Ideas
The Trade: Sell the MCD JanN 2019 $135 naked put. This is a bullish trade where I collect $2 to open. Here I have a 85% theoretical chance of success, but if the price falls below my strike then I accrue losses below $133.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the MCD Jan 2019 $135/$130 bull put spread, where I have the same odds of winning. Then the spread would yield 15% on risk.
The macroeconomic thesis is the driver of all conviction trades. So click here for a quick review of what’s driving this one and to get my free newsletter.
Learn how to generate income from options here. 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 as @racernic on twitter and stocktwits.