After months of holding, McPowell delivered the $295 Price Target
I did not expect Powell to be as dovish as he was at December ‘23 FOMC. The Fed held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond. This “surprise” announcement pushed the indexes much higher after 2pm, including McDonald’s.
Buying is easy, selling is hard
The January ‘24 $295 calls I’ve been holding since August surged beyond my expectations. The underlying on October 6 was $244.47 while my call premium yielded meager $0.30. Today, the same contracts closed at $5.90 with the underlying at $295.93. A whopping 1,866% gain.
I discussed trimming the same contracts on November 29 and am glad I did then. It’s foolish to look back on my earlier profit-taking and have remorse today when the underlying is trading higher. Trading is about probabilities, not certainties. It’s absolutely unreasonable to think that one can enter the bottom and sell the top. In the long run, selling into advances, by laddering, is how you win this game.
“I never buy at the bottom, and I always sell too soon.”
— Baron Nathan Rothschild
There are no set rules on profit-taking; however, as an options trader, it's prudent to shift the focus from the gains percentage of the premium to the underlying price target. Focusing too much on the percentage of premium alone can leave massive gains on the table because a trader might be overlooking the big picture. It’s called a derivative for a reason — and, ultimately, the underlying price target and action are what truly matter.
McDonald’s Final Boss: The Big Picture
One of the toughest, discomforting moments in trading, whether commons or equities, is knowing when to sell – when in fact it should be a joyous occasion for taking profit. Our fallacy is that we hold when we should sell, vice versa, sell when we should hold.
How do you overcome this typical human impediment?
Examine the weekly and monthly charts, in that order.
For example, the daily “indicators” for McDonald’s have been flashing "oversold” for a few days now – but it’s secondary to the weekly chart many institutions rely on. Here, it’s still on an uptrend and is about to test the key area ($295.98) from July ‘23; closed at $295.93 as of December 14.
If it closes and settles above this ATH, the next PT is likely to be above $300. This is because there are less large volume, block institutional sellers above the ATH and applies to other names as well.
The 20-year monthly chart shows an acceleration in its stock price, particularly in the years 2015-16, with a discernible angle of attack increasing from 20-30 degrees to 45 degrees on the chart. McDonald’s price movement the past three months only confirmed this trend. Thus, if the Investor Day Presentation provided any forward pricing power on its business expansion, it’s more than likely that it’ll push through the two areas: 1) the ATH at $295.98; and 2) the psychological barrier at $300.
Alignment of macro data, fundamentals, and technical analysis
All in all, many key variables are aligning for McDonald’s to reach a higher high. These trades offer higher probability of success over trying to bottom-fish a position. While bottom fishing may yield better returns, the success rates are often much lower.
When in doubt about when to sell, doing the opposite of your initial impulse might be the right move.
Disclaimer: I have OTM ‘24 calls in my portfolio. Enter at your own risk, seriously. This is not for boy scouts.
Thank you George!