Trade of the Day: McDonald’s Corp (MCD)

Overpriced stocks are prime for a "market insurance" position

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My indicators are giving bearish readings, a downgrade from neutral to slightly bearish readings the previous week. The indicators are based to a degree on the market’s advance/decline line — the ratio of advancing stocks to declining stocks — and that is starting to deteriorate.

This ratio acts as sort of a “canary in the coalmine,” and it does a pretty good job of providing an early warning of what could happen next. Therefore, I wouldn’t be surprised to see some corrective action in the near future.

I think we are experiencing a rolling bear market. In other words, several sectors, including financials and real estate, have moved into a bear market, while the outsized gains in the tech stocks have been holding up the major indices. Now, however, we’re starting to see the “FANG” stocks — Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc Class C (NASDAQ:GOOG) — get hit really hard.

Given that we are also going into a bearish time of the year, I’m looking for trades that offer “market insurance,” hence today’s recommendation on McDonald’s Corp (NYSE:MCD):

Using a spread order, buy to open the MCD Sept. 21st $150 put and sell to open the MCD Sept. 21st $145 put for a net debit of about $0.90.

For those who may not have used this debit-spread strategy before, this is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.

I think McDonald’s has gone up too far, too fast. It’s been up there for a long time — and the company has shown a lot of improvements in its franchise system — but it’s probably one of the most overpriced fast-food stocks.

So, MCD is due for a decline. Our September expiration gives us a little time, if we need it.

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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.


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