Name That Trade – $MCD: Super Sideways Me

by Dan July 22, 2015 3:35 pm • Commentary

Event: MCD reports Q2 results prior to the open tomorrow, the options market is implying about a 3% one day move, which is rich to the 4 qtr avg of about 1.7%.  

Price Action / Technicals:  Despite what has seemed like no shortage of bad news in the stock in a year that saw a sweeping management change, the stock is actually up 4% on the year, and 4% from the 52 week highs made in March.

Since the CEO change in early March, the stock  has been in a well defined trading range, having been rejected 2x at 101, and bouncing off of $94 on the downside, with the stock trading now at the dead midpoint of the range:

[caption id="attachment_55563" align="aligncenter" width="600"]MCD 1yr chart from Bloomberg MCD 1yr chart from Bloomberg[/caption]

On a longer term basis the 5 year chart below shows the massive resistance at $103ish and decent support at $90.  These could be decent levels to target in effort to structure trades with options.

[caption id="attachment_55566" align="aligncenter" width="600"]MCD 5 yr chart from Bloomberg MCD 5 yr chart from Bloomberg[/caption]

For those that think the news flow in MCD will get less worse, and that management initiatives will affect positive change in the back half of the year, then trade structures that offset decay, but offer leverage in the event of a breakout make a lot of sense.

I would be surprised if there is much on tomorrow’s call that causes a re-test of the all time highs, but it could set the tone for a more constructive future.

One trade I might consider following the results would be bullish risk reversal.

For instance with the stock at $97.50, the Jan16 90/105 risk reversal is offered at a .75 credit, selling the Jan16 90 put, and buying the Jan16 105 call.  There will be an 85 cent quarterly dividend paid in November, so essentially this structure is premium neutral, with losses below $90 on Jan16 expiation, and gains above $105.  Between now and Jan16 expiration the position will have mark to market losses as the stock moves closer to the short put strike or gains as it is closer to the long call strike.  The strongest likelihood is that there is no gain or loss on Jan16 expiration, but you have essentially set a limit order on the downside at $90 and on the upside at $105 without a premium outlay.

We will take another look post results, but restructurings in companies like MCD offer a certain appeal for investors.  Let’s see what their tone is as activists seem interested in helping the company figure out how to unlock value.