Like a drive-thru Sausage McMuffin and hashbrown order at 10pm, the euphoric rush for investors surrounding McDonald’s (MCD) addition of all day breakfast (last year) has given way to regret and self loathing. In 2015, MCD’s was one of the best performing stocks in the Dow Jones Industrial Average, up 26% on year, with the gains continuing into the New Year, having made all time highs near $131 in early May, marking an 11% ytd gain. Since early May the stock has been in a fairly consistent downtrend, having just made the first lower low in a very long time, with this week the 50 day moving average crossing below the 200 day moving average (often referred to as a death cross) and now sitting on massive 9 month support at $115. To say the stock is at a precarious technical level is an understatement:
With new management at the helm last year, a restructuring included a major menu overhaul. With that, global comps picked up for the first time in a long time. Couple that with the company’s fat 3% plus dividend yield and the stock went berserk. The five year chart below shows the epic breakout. But it has recently lost some steam. A gap fill towards $105 does not seem out of the question, especially if the company were to disappoint on Q3 guidance that was already tempered last month. That update resulted in a 4.5% one day sell off in the shares on July 26th:
Despite the stock’s steady decline since earnings, which is evidenced by the pick up in 30 day at the money realized volatility (white line below), options traders don’t seem too bothered near term, with 30 day at the money implied volatility (the price of options – blue line below) just off of 52 week lows:
Sales are expected to decline 4% in 2016, its 3rd consecutive decline, yet restructuring efforts are expected to yield double digit eps gains for the first time since 2011. Another guide down in October, and the stock will be re-rated, despite the capital return as the stock trading very near 21x 2016 expected eps is rich to its history.
So How Do You Trade This?
The stock could hold this support level. If it does do that it’s likely right back to those converging 50 and 200 day moving averages around $120. But the stock is likely to struggle at that point of resistance. Those looking for a short entry should keep that $120 level on alert. For those long or looking to get long, this level is precarious and a break below here could do some damage technically. So establishing a bit a safety net is possible by doing a risk reversal instead of owning shares. For instance the Oct 105/120 risk reversal (selling Oct 105 put, buying Oct 120 call) can be done for about 10c. That means if the stock is in the 105-120 range it’s nothing done, but above 120 and it’s like owning stock, and below 105 it’s like owning stock. There is a dividend in late August that is missed with this method but that’s also why the trade is basically even money, despite the call being only 5 dollars away while the short put is around $10 away.