McDonald’s Corporation (NYSE:MCD) looked every bit the ‘happy meal’ for Wall Street’s bulls in Thursday’s session. But if you’re looking to nibble without a possible case of heartburn later on, try a moderately bullish butterfly spread off the MCD stock options menu. Let me explain.
Investors gobbled up shares of McDonald’s following news the world’s largest fast-food chain was trimming the fat — pardon the pun — within their workforce. The announcement is part of a restructuring aimed at building stronger franchisee support while allowing McDonald’s to become more “nimble and competitive.”
The number of planned job cuts wasn’t revealed in Thursday’s announcement. Nevertheless, a fairly confident Wall Street sent shares up nearly 4.5%, with details to be discussed during a June 12 town hall meeting.
MCD Stock Weekly Chart
Looking at the weekly chart of MCD stock, Thursday’s heavy-volume price spike has cleanly pushed shares into the upper 1/3 of a four-month-long corrective, first-stage base. It looks bullish to say the least and shares are anticipated to eventually break out from the cup-shaped pattern.
In the here and now, shares might run a bit higher as conditions aren’t so overbought as to prevent some additional chasing. However, I believe an orderly technical consolidation to digest gains and put MCD stock in a stronger technical position is likely over the next few to several weeks.
MCD Stock Moderately Bullish Long Butterfly Strategy
For investors agreeable with our bullish outlook for MCD stock but who realize Thursday’s beefy price move isn’t the start of a sustainable momentum trend given McDonald’s size and growth prospects off the chart, I like the idea of buying a moderately bullish long call butterfly spread.
Reviewing the MCD options board, one combination which looks attractive is the Aug $180/$185/$190 call butterfly for 45 cents per spread or the equivalent of just over 0.25% of the risk associated with holding long stock in McDonald’s.
The pricing allows for bullish traders to participate and profit from a continued rally if shares finish in-between $180.45 and $189.55 on an expiration basis. The maximum profit capture is $4.55 if MCD stock breaks out to new highs, follows through and lands squarely on $185 on the third Friday in August.
The massive and idealized return would require a much lesser, but still formidable rally of 9% in shares. That’s a decent size move, but there is a late July earnings event in MCD stock which could act as a catalyst.
The real risks with this bullishly positioned play is if MCD stock rallies, but falls short of moving into the butterfly structure or overshoots the upper $190 call wing. Ultimately, either scenario would result in the trader forfeiting 50 cents at expiration as the embedded verticals would be worth either $0 or $5 and canceling each other out.
Bottom line, if you’re agreeable with McDonald’s shares moving higher but see the Golden Arches and not the sky as the limit, then ordering this butterfly off the options menu looks very satisfying without the risk of heartburn.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
