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.
|Week||SD1 68.2%||SD2 95%||Earns|
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.
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 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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