McVolatility and the Directional Bet
Through the years
McDonald's
(MCD) - Get Report
has evolved almost as quickly as its slogans have changed. It has had some massive successes in ads and products. The HappyMeal, the Chicken McNugget and the monopoly game are a few that come to mind. There have also been some major stinkers, the Arch Deluxe and the McDLT are a couple that fall into this category (although, my brother John almost cried when it killed the McDLT).
The Arch Deluxe in particular rolled out at a particularly low time for the company, a time when the stock price got into the mid teens. Since that time, McDonald's has rolled out winner after winner, and expanded into more and more countries. Right now MCD is sitting right on top of, not only its 52-week high, but its all-time high. Some traders appear to think that the company may have hit some sort of temporary top.
The stock has failed to break $80.00 the last few times it has tried, despite an SPX that is breaking 52-week highs, great earnings and relatively successful product roll outs (save the McSmoothie). This could be why there has been one-sided buying of the January 75 puts. Over 15,000 contracts have traded hands, rallying January implied volatility up over a full percentage point (not a small move in a stock as liquid as MCD).
This play makes a lot of sense in that it can benefit in many ways. implied volatility) in January is still toward the lower end of where MCD has traded over last year, these puts will benefit with a modest increase in implied volatility. This could be driven by the general market, which is likely to have some sort of turnaround between now at January expiration. It could also increase from MCD itself taking a slight breather in its climb upward. While I would never bet against this giant in the long run, if the company rolls out another McSmoothie it could certainly take a slight dip.
In either scenario, buying decently low volatility on a directional bet either way makes sense to me. As a trader that prefers not to argue with paper flow, I would lean bearish on the stock. Right now, the cheapest option on the board In January is the 80 strike. I would buy the 80 strike and sell the 75 strike that has seen its implied volatility rally.
Trades: With MCD trading at $78.95, buy to open MCD January 80 puts for $3.20 and sell to open MCD January 75 puts at $1.25.
Net buy the MCD 75/80 put spread for $1.95.
**If the volatility discussion in the above piece interested you, and you want to learn more about volatility, TheStreet's OptionProfit's Team is hosting the first in what we hope will be many webinars. The Title of this one will be "Not All Delta's Are Created Equal." Look for the opportunity to register shortly. You may also check out my blog which focuses on volatility http://www.optionpit.com/blog.
At the time of publication, Mark Sebastian held no positions in the stocks or issues mentioned.
Mark is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange, and is currently the Director of Education at The OptionPit.com and the Director of Risk Management for a private hedge fund. Mark also writes Option911.com, a popular index and equity options blog.
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