On December 22nd we detailed a trade in McDonalds (MCD) that looked to fade the recent breakout in the stock. We chose a slightly out of the money put fly to express this view and targeted 110 on the downside. Our breakeven on the trade is at 114.40. Here was the original trade and rationale:
*Trade: MCD ($117.75) Buy Feb 115 / 110 / 105 Put Butterfly for 60 cents
-Buy to open 1 Feb 115 put for 2.66
-Sell to open 2 Feb 110 puts at 1.42 each or 2.86 total
-Buy to open 1 Feb 105 put for .80
Rationale: This trade kind of attempts to thread the needle, but I suspect on a sell off the stock finds decent support at $110, a reasonable target. If the stock were to sell off 6.5% in two months back to technical support, I could make 6.5x the money I risked on the short trade, I like that risk/reward. Yes this is out of the money and long premium, but one of the reasons we are using a put butterfly structure to help offset some near term decay over the holidays and into the new year.
Now the stock is just slightly above our 115 long put strike and trying to hold that level. It’s bounced several times over the past week at that level which is also the 50 day moving average (currently the 50 day moving avg is 115.22. today’s low was 115.32):
[caption id="attachment_60234" align="aligncenter" width="603"]
5 day chart from LiveVol Pro[/caption]
[caption id="attachment_60232" align="aligncenter" width="604"]
6 month chart from LiveVol Pro (50 day moving avg in red)[/caption]
So with MCD now at 115.70 this put fly is worth about .75, so not much of a profit yet. In order for this trade to really work we need the stock to fail at the 50 day moving average. An air pocket exists below that level to say the least. So as far as trade management that’s the level we’re looking at. The more it holds the more we’ll have to think about keeping the trade from becoming a loser on rallies. A break below that and we can be patient and look for weakness of a few dollars that could come fairly quick.