McDonald's v10.0: McVolatility
$MCD: The Golden Arch Trade No One Talks About
The illusive McDonald’s LEAPS trade is NOT for the weak of heart.
I’m starting the McDonald’s post with “v10” because I’m no stranger to trading MCD LEAPS for years. I particularly enjoy the trade because 1) the earnings and sales YoY are “somewhat” predictable; 2) technical patterns adhere to the basic rules; and 3) the options’ premium move aggressively due to the underlying institutional block orders. I’d argue that the last point is what makes the trade special; similarly, it’s the double-edge sword that can make an old man cry. Proceed if you’re an adrenaline junkie like myself.
“The Golden Arch” Patterns
As ridiculous as it may sound, McDonald’s chart has consistently shown the 'Golden Arch' pattern before its advance – but it also serves as a testament to its tendency to pull back ferociously. It would be remiss not to recognize how significant the pullback has been for the Dow Jones Industrial Average as a whole, and specifically for McDonald’s, this past month. (I’ll discuss the fundamental news events that caused the pullback in another post.)
A Blue Chip that typically corrects 10%+ at a time
This week, for example, flushed on various news I’ll discuss in another post. However, McDonald’s historically has a tendency to pull back between 10-15% on corrections. Aside from the Covid crash of March ‘20, it is currently within its 'normal' standard of distribution, albeit carrying its usual velocity, which can make old men cry if solely focused on 1-minute candles. I'd argue here that the weekly trendline is intact, and it's likely to bounce off of these levels unless the 10-year yield decides to march on. As of this writing, it’s at 4.762%.
The dividend bucket in turmoil
I tend to move towards consumer defensive names, particularly the ones that pay dividends, on higher rates and higher WTI crude prices. This approach has served me well between 2009 through 2013 post Great Financial Crisis, yet I can’t ignore the real rates. Here is a look the past 6 months against S&P 500 and Nasdaq:
McRib call options: They’re just as divisive as the sandwich
This is where the high and low of the trade is, in my opinion. Out-of-the-money (OTM) calls tend to be quite cheap compared to the in-the-money (ITM) and at-the-money (ATM) garden variety, but the odd lot is the high Open Interest on the OTM strike options.
This, to me, signifies that speculators are making this trade on gamma, propelled by the underlying block orders from institutions amidst low Implied Volatility. In other words, the premiums on OTM calls will likely exhibit outsized, disproportionate returns if timed correctly. Conversely, premiums could lose value just as quickly on an underlying pullback. Another thing to note is the wide discrepancies in premiums between various strikes; for instance, if and when the initial OTM contracts turn in-the-money, it's likely to be a rewarding trade.
Therefore, in my opinion, this trade should be executed in conjunction with consideration of corporate events, fundamental and technical analysis, and proper options configuration.
As for the fundamentals and sentiment of the company, I’ll discuss in another post. There’s a lot to unpack and dissect covering the past eight weeks – and it ain’t pretty.
Disclaimer: I have a long position in MCD, with OTM calls expiring on January 19, 2024.
Great take, very interesting setup ... thank you and have a great weekend!
Thanks for laying out the rationale and the setup! Excellent writeup.