When it comes to the McDonald’s (NYSE:MCD) stock chart, there’s only one thing to say: I’m lovin’ it. But it’s not just me. I’m simply taking my cues from the masses. Price charts are the lens by which we view crowd psychology. With MCD stock fresh off notching a record high, is it any wonder how the Street feels about the golden arches?
Nope.
They’re gobbling shares up faster than french fries. It’s particularly impressive that their appetite didn’t wane during the recent market correction. September’s swoon took the S&P 500 11% off its highs.
Though not quite a bear market, it certainly qualified as more than a garden-variety pullback. Support cracked along the way, as did the critical and oft-watched 50-day moving average. Then there are the volume patterns. Distribution days littered the landscape like the forgotten suitcases of institutions hightailing it out of town.
MCD Stock Chart
Given the widespread liquidation, any stock would be forgiven for faltering. But McDonald’s doesn’t need any absolution, thank you very much. While its fellow large-caps succumbed to selling pressure from rabble-rousers, the restaurant king was sitting safely on its throne, unperturbed and virtually unaffected by those storming the gates. MCD stock’s peak-to-trough drawdown was only half that of the broad market (-5% vs. -11%).
As for the moving averages, not only did McDonald’s remain above its 50-day, it barely even scratched the 20-day. Only two days over the past few weeks saw closes below this short-term indicator. We’ve now closed back above it for four straight trading sessions, and I’m inclined to believe more gains are in store.
The final comparison worth consideration is the volume patterns of MCD stock versus the market. While distribution days multiplied in the likes of the Nasdaq and S&P 500, they were almost nowhere to be found in McDonald’s. I count a single session that saw higher-than-average volume while the stock was sinking. And then, nothing. No follow-through. No one-two combo to take the stock down at the knees. Just a single, isolated session of slightly heavy selling.
In my experience, the stocks that hold up the best during a market temper tantrum are those that lead the next leg higher once bears have finally been chased off the property. That’s the takeaway from my analysis of the price action. And that’s why we’re crafting a bullish leaning trade.
Buy Bull Calls and Chill
I have a three-pronged approach when it comes to selecting options strategies. First, I consider the stock price. If it’s cheap, then long calls or puts are on the table. If it’s expensive (like MCD), then spreads are a must.
Second, I look at implied volatility. If the rank is beneath the 25th percentile, then options are cheap, and I’m buying them in some fashion. If it’s above the 50th percentile, then premiums are pumped, and I’m favoring selling them. In the case of McDonald’s we’re sitting at 17%, so long premium plays it is!
Third, I consider just how aggressive I want to bet. The steady nature of the trend leads to a moderately bullish posture. Throw all three factors together and bull call spreads become an obvious choice.
The Trade: Buy the November $220/$230 bull call spread for around $4.20.
The original cost of $4.20 is the max loss and will be forfeit if MCD sits below $220 at expiration. The max gain is $5.80, and will be yours to keep if the stock rises above $230 by expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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