New Trade Alert for (MCD)
Buy January $90.00 Call @$10.00 or less
Risk Rating: 3 (1 = lowest 5 = highest)
Above Break Even Probability: 47%
Probability of maximum loss: 22%
Place Stop Loss at half of premium paid.
Positive Performer with Pricing Power
The Blue Chip industrial stock index has been beaten DOWn with a double digit loss for 2015 and a modest 4% loss in the last 52 weeks of trade. Weak performances by BIG names like Exxon and Wal-Mart have seen some giants fall for now.
An icon McDonalds has suffered in the public relations battle and in the financial media for not being able to right the ship. Golden Arches are one of the few positive performers in the DOW at a plus 5% YTD.
Pricing power has allowed MCD to finally bump up prices on the “Dollar and More” menu. The tiny change from 99 cents to $1.19 to $1.39 on a breakfast burrito is an example of the barely noticed but bottom line booster.
A quiet 40% price increase gets multiplied many times over with the volume at MCD.
Oh, AND BREAKFAST all day is very profitable…
MCD has a two year pivot at $95 with sideways action between $102 and $88 over that time.
The test of the support at $88 August 24th and failure to push below has since seen a bounce back. The first target is the upper channel top at $102 then $120.
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 $98.00, for example, an In The Money $90 strike option currently has $8.00 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 January MCD $90.00 Call at $10.00 or less. A close below $94.00 on a weekly basis or the loss of half of the option premium would trigger an exit.
This option strike gives you the right to buy the shares at $90 with the 52 week lows at $88. A long call has absolutely limited risk. The January option has over three months for development.
The maximum loss is limited to the $1000 or less paid per option contract. 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 78% Delta means the option will act much like the stock shares in performance.
The MCD option trade break-even is $100 at expiration ($90.00 strike plus $10.00 or less option premium). That is little more than $1.50 cents above McDonald’s current price.