New Trade Alert for (MCD)
Buy June $110.00 Call @$12.50 or less
Risk Rating: 3.5 (1 = lowest 5 = highest)
Above Break Even Probability: 54%
Probability of maximum loss: 10%
Place Stop Loss at half of premium paid.
Lovin It At This Level… McDonalds
DOW dominated 2016 up 13% on the year and more impressively up nearly 30% from the extreme lows in February.
Not ALL Blue Chips had big bounces with a handful of the 30 DOW components lagging behind. Compare the 23% industrial index jump to MCD up only 2% over the last year.
Extra catch up is on the order for the burger baron.
McDonalds had a big year in 2015 jumping from $90 to $120 but topped out after the breakfast for dinner rally run to peaked above $130.
Oh, AND BREAKFAST all day is very profitable…Earnings and Revenue beat estimates today even against the difficult comparison against this quarter last year where the new ALL DAY McMuffin and more debuted.
MCD technically has a two year midpoint pivot at $110 and a perfectly symmetrical chart pattern.
A one year range from $110 to $130 has retraced to the halfway support.
The move above $120 targets the $130 resistance top then $140 as the higher objective.
Instead of buying long shares, a stock substitution strategy limits risk to the premium paid with unlimited upside profit potential. Less capital is required and the risk is less in dollar terms than buying shares outright.
The Options Way: Unlimited Upside Potential with Limited Risk.
An MCD long call option can provide the staying power in a potential larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money expiration.
Buying better options is expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With MCD trading at $121.25, for example, an In The Money $110 strike option currently has $11.25 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the June MCD $110.00 Call at $12.50 or less. A loss of half of the option premium would trigger an exit.
This option strike gives you the right to buy the shares at $110 below the 52 week lows. A long call has absolutely limited risk. The June option has five months for development.
The maximum loss is limited to the $1250 or less paid per option contract with an exit stop loss is set at half of the premium paid to reduce risk exposure.
The upside, on the other hand, is unlimited. A 88% Delta means the option will act much like the stock shares in performance.
The MCD option trade break-even is $122.50 at expiration ($110.00 strike plus $12.50 or less option premium). That is little more than $1.00 above McDonald’s current price.
A modest move to the $130 top of the trading range would make the option worth $20 for a 60%+ gain.