New Trade $MCD – McFlurried

by Enis June 10, 2013 10:11 am • Commentary

I posted a Name That Trade post in MCD about a month ago, describing the potential future path of MCD stock that might get me interested in a new trade entry based on its fundamental and technical backdrop.  Here is what I said in that post:  

We are doing nothing now, but I would get even more interested if MCD showed more weakness in the weeks ahead, and then gave me a decent entry on the short side by bouncing back up to the $100 level.  For now, last week’s selloff was the initial alert that has focused my eye on the name, but I want to see more before pulling the trigger.

Fast forward to today, and that is precisely what has happened.  The stock is higher this morning on news of better comp sales from MCD, but the stock is already quite expensively priced in my view, as I laid out in the Name That Trade post included below.  So here’s the trade:

TRADE: MCD ($99.90) Bought the July 100 / 95 Put Spread for $1.43

-Bought 1 July 100 Put for $2.00

-Sold 1 July 95 Put at $0.57

Break-Even on July Expiration: 

-Profits of up to btwn 98.57 and 95, max gain of 3.57 at 95 or below

-Losses of up to 1.43 btwn 98.57 and 100, max loss of 1.43 at 100 or above

Risk Chart:

[caption id="attachment_26844" align="aligncenter" width="511"]Screen Shot 2013-06-10 at 8.05.57 AM from TradeMonster[/caption]

This is a pretty straightforward trade of about 32 deltas. Those deltas sharpen towards 100 or 0 (depending on whether stockis above or below 100) as we get closer to July expiration.

Trade Rationale:  MCD implied volatility is quite cheap, around 15, especially given that 10 day realized volatility in the name is now up to 25.  So we want to do a long volatility structure, but chose July to give us enough time for the trade to play out.  We decided to sell the July 95 put since that is the low from last week and the 200 day ma is around 94, so the odds are against significant downside below there.

 

 


Name That Trade $MCD – Golden Arches, May 13, 2013:

McDonald’s has been on an incredible decade-long bull market run, knocking off fast food competitors left and right and making tens of billions of dollars for its shareholders in the process.  Here is the 20 year monthly chart for perspective:

[caption id="attachment_25815" align="alignnone" width="626"]20 year monthly chart of MCD, Courtesy of Bloomberg 20 year monthly chart of MCD, Courtesy of Bloomberg[/caption]

In the past 10 years, MCD has increased its annual earnings per share by a multiple of 4, but the stock has done even better, up about 8x from its low.  It’s a 3% yielding, well diversified, consistently performing $100 billion market cap company that’s a leading exporter of Americana.  What’s not to like?

Well, Mickey D’s is showing some signs of strain, both fundamentally and technically.  In fact, MCD only grew earnings by 2% in 2012 vs. 2011.  Last week, MCD moved lower on Wednesday after revealing that same store sales in were lower again in April, led by weakness in China and Europe.  But MCD is also having trouble dealing with increased competition from Wendy’s in the U.S.

But our main concern for the stock is its 70% of sales outside the U.S.  Sales trends are weak overall, and the stronger dollar is going to make those international sales look more like a burden than a boon in the coming quarters.

The stock broke its 50 day for the first time in 2013 last week on big volume (red circles), and I get the sense that it might be the start of a bigger move.

[caption id="attachment_25816" align="alignnone" width="631"]1 year daily chart of MCD, Courtesy of Bloomberg 1 year daily chart of MCD, Courtesy of Bloomberg[/caption]

We are doing nothing now, but I would get even more interested if MCD showed more weakness in the weeks ahead, and then gave me a decent entry on the short side by bouncing back up to the $100 level.  For now, last week’s selloff was the initial alert that has focused my eye on the name, but I want to see more before pulling the trigger.