Thursday, April 21, 2016

MCD Analysis

5/9/2016: MCD engaged in a slow rise after earnings were published and today passed my exit point. I got out with 55% of the potential profit.

Shars rose by 2.6% over 17 days, or a +55% annual rate. The options position produced a 122.4% yield on debit for a +2,628% annual rate.

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

[MCD in Wikipedia]


I shall use the JUN series of options, which trades for the last time 57 days hence, on June 18.


Implied volatility stands at 21%, which is 1.5 times the VIX, a measure of volatility of the S&P 500 index. MSFT’s volatility stands in the 62nd percentile of its most recent range. The price used for analysis was $127.66.

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

A book from my library →

The Trade

MCD has been on the rise since March 2003 and nothing, not even the Great Recession of 2008-09, was sufficient to stop the juggernaut on its upward course.

There was a significant pause from January 2012 to August 2015 that ended with the present leg up, which it a highest high on Wednesday.

Brokerages in aggregate give MCD a negative 26% enthusiasm rating, with 35% of 23 analysts issuing strong buy recommendations.

Shares closed higher in the first trading sessions following three of the last four earnings announcements.

I build a bull play for this trade.
Bull put spread, short the $125 puts and long the $120 puts,
sold for a credit and expiring June 19.
Probability of expiring out-of-the-money
The premium is $1.29 which is 26% of the width of the position’s wings. The stock at the time of entry was priced at $127.90.

The risk/reward ratio is 2.9:1. The risk/reward ratio is on the high side but still below my maximum acceptable 3:1.

The zone of profit in the proposed trade covers a $1.10 move below the entry price and everything above it. The biggest immediate move after each of the past four earnings announcements was $8.33, and the average was $3.15. After eliminating the maximum and minimum post-earnings movements, the core tendency is $1.89.

Decision for My Account

I've opened a position in MCD as described above.

-- Tim Bovee, Portland, Oregon, April 21, 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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