McDonald’s (NYSE: MCD) is higher by over 12% year to date and 13 of the 20 covering analysts polled on rate the company a “Strong Buy,” according to the OptionsHouse Research tab. The stock is currently trading at $70.95, near new 52-week highs.
Thanks to the advent of options trading, there is more to investing than buying, selling, and holding. Here are two hypothetical options trades: one for investors who are bullish on McDonald’s and one for those who think McDonald’s upside may be limited over the next several months. Note that these are not buy-sell-hold recommendations and be sure to always do your own equity research and consider your personal risk/reward parameters before opening any new trades.
*Prices given as of Tuesday afternoon
Bullish Option Strategy: Long Call
Investors who hold a bullish opinion on MCD may not want to shell out more than $7,000 for 100 shares of MCD but could consider a long call trade. Long calls require less capital up front and each contract represents the right to buy 100 shares of the underlying stock at the strike price. For this reason, as the stock moves, the derivative should move as well.
The January 2011 65-strike calls are currently offered at $7.65 and contain nearly $6.00 in intrinsic value. At expiration, assuming the investor holds the option this long, breakeven is $72.65. Above this level, profit is theoretically unlimited, while the maximum potential loss is limited to the premium paid.
If MCD were to rally to $80 before these options expire, 100 shares of stock would be worth $8,000 – a percentage return of 12.7% and an absolute dollar return of $905. With the long call, a move to $80 values the call at $15 at expiration, a percentage return of 96% and an absolute dollar return of $735.
Neutral Option Strategy: Iron Condor
If stock investors have a neutral opinion on a particular company, there isn’t much they can do to try and profit from it. On the options playing field, however, there are strategies that can be successful if the underlying stock trades within a narrow range. One of these neutral strategies is the iron condor, which combines two credit spreads – one bull put spread and one bear call spread. Currently, a September-dated condor could be executed by trading the following four legs simultaneously:
• Short the September 67.5/62.5 put spread (by selling the 67.5 put and buying the 62.5 put)
• Short the September 75/80 call spread (by selling the 75 call and buying the 80 call)
The overall net credit for this trade is $2.00, which is also the maximum potential profit for this trade. If MCD is trading between the two short strikes (67.50 and 75) when these options expire on September 17, all options expire worthless and the condor trader keeps the credit as profit. The maximum potential loss of $3.00 occurs if MCD is trading below $62.50 or above $80 at expiration. The upper and lower breakevens for this trade are $65.50 and $77.00. If MCD is trading anywhere between these levels at expiration, the condor will be profitable.
Does Your Portfolio Crave McDonald’s? Are you “Lovin’ it”?
Are you a McDonald’s fan, or do you think the stock’s uptrend can be an investor’s friend for only so long? Would you consider the stock a buy at its current price?
Compare OptionsHouse rates for stock options with other brokers. For investors who are new to options and want to try out their trades without committing real money, practice using a free virtual trading account.
Photo Credit: RockNRoll_Guitar
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Tags: Iron Condor, Long Call, MCD, McDonald's, Options Strategies, options trading
