Update – Closing $MCD Put ButterFly for a Wash

by CC January 15, 2016 12:59 pm • Trade Updates

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 break-even 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.

The stock has shown very good relative strength and continues to bounce whenever it looks like it will breakdown below its 50 day moving average.

With MCD now $114.90 this put fly is worth about what I paid last month. Because of the relative strength after such a sharp selloff in the broader market we’re going to take this trade off, and look for better short targets on a rally.

ACTION – Sold to close the MCD ($114.90) Feb 115 / 110 / 105 Put Butterfly at 60 cents