Friday, January 22, 2016

MCD Analysis

Update 2/16/2016: MCD reached 53% of its potential and I exited for a profit. Shares rose by 0.9% over 25 days, or a +13% annual rate. The options position produced a +98.1% yield on debit for a +1,432% annual rate.

The fast-food chain McDonald's Corp. (MCD), headquartered in Oak Brook, Illinois, publishes earnings on Monday before the opening bell.

[MCD in Wikipedia]


I shall use the MAR series of options, which trades for the last time 56 days hence, on March 20.


Implied volatility stands at 30%, which is 1.3 times the VIX, a measure of volatility of the S&P 500 index. MCD’s volatility stands in the 87th percentile of its most recent range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

MCD has been in a sharp uptrend since Aug. 25, 2015. The present leg up reversed on Dec. 29 in what may be a pause or a counter-trend correction. This bullish movement comes in the context of a broad market that has been on the decline since early November 2015.

Two out of the last four earnings announcements have been followed by price increases on the next trading day.

Brokerages collectively give MCD a negative 14% enthusiasm rating, with 41% of 22 analysts following the stock making strong-buy recommendations.

The beta is 0.51, meaning that MCD correlates with the S&P 500, but poorly so.

A mixed assessment. I'll go with a direction neutral play but shall skew to the upside to provide a greater zone of profit of the price rises post-announcement.

Iron condor, short the $130 calls and long the $135 calls,
short the $110 puts and long the $105 puts,
sold for a credit and expiring 
March 21.
Probability of expiring out-of-the-money

The premium is $1.05, which is 21% of the width of the position’s wings. The stock at the time of entry was priced at $117.77.

The risk/reward ratio is 3.8:1.

The zone of profit in the proposed trade covers a $10 move either way. The biggest immediate move after each of the past four earnings announcements was $8.33, and the average was $3.28. The central tendency, with the outliers removed, was $2.15.

Decision for My Account

I have entered a position on MCD as described above.

-- Tim Bovee, Portland, Oregon, Jan. 22, 2016


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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