[Options] McDonald's May Be a Healthy Addition to Our Portfolio

Sean McLaughlin
November 16, 2022

So we were talking about a guy who's apparently subsisting only on McDonald's patties for the next 30 days. Just the patty --- no bun, no condiments, no lettuce. He's trying to prove some kind of point that it's not McDonald's burgers that are unhealthy, it's everything else in a typical American's McDonald's order at the drive-thru window.

Ok. Whatever.

But all this "healthy McDonald's" talk got us thinking about the even healthier looking chart of its stock $MCD in recent weeks:

We saw a pretty significant breakout this autumn, followed by a successful retest this week.

What we like about this retest is that it gives us a good opportunity to participate in a resumption of this uptrend and leverage into it thanks to a nearby risk-management level.

So we're going to order ourselves a Big Mac (hold the bun?) and dive into an aggressive bet with options.

Here's the Play:

I like entering a $MCD Mar 260/290 Bullish Risk Reversal spread. This means I'll be naked selling March 260 puts and buying an equal amount of March 290 calls. Netting these two trades together, we can collect an approximately $1.25 credit!

The PnL Graph for this trade will look like this:

Due to the naked puts, this position will require approximately $5,000 per unit (one short put + one long call) held by our brokerage. And since these naked puts feature theoretically unlimited risk, we'll be vigilant with our risk management.

We're going to use this week's low of $265 as our risk line. If $MCD sees a close below $265 at any time during our hold, no matter what our position looks like (see below) at the time, we'll exit the entire remaining position and book what will likely be a small loss.

In the meantime, we'll keep an eye of the value of our calls if $MCD resumes it's uptrend. When the value of the long calls equals or exceeds 2x the value of the short puts, then I'll look to sell half of my calls and use those proceeds to close ALL of my short puts. For example, if the calls are trading at $10 per contract and the puts are trading at $5 per contract, then I'll close two puts for every one call I close. If that happens, then I'll have zero net risk in my remaining long calls. In fact, I'll have a built-in net credit thanks to the credit we receive today. That's a guaranteed win!

No stronger position than that!

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live video Jam Session where we review activity in our options portfolio from the past week can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

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