Option Spread Portfolio: How To Trade McDonald's Through July

Jun. 7.12 | About: McDonald's Corporation (MCD)

Daily Data: McDonald's (NYSE:MCD)

On May 30th news was released that McDonald's plans to open 1,300 new restaurants in 2012. These restaurants will not be opened in the U.S> (where McDonald's has experienced negative same store sales growth) but Japan and Latin America where growth is available. Yet, all is not well. McDonald's has been worried about the rising cost of commodity prices (wheat and corn). Given the recent sell-off in commodities and strengthening dollar, I do not think McDonald's will experience any hard felt variable costs this quarter. Fundamentally, this is a sound company but growth is beginning to wane relative to the past. The EPS growth rate for the past five years has been 18.13% whereas the five year future growth rate is expected to be 9.99%. At a 1.62 PEG, McDonald's is overvalued relative to both next year/5 year growth expectations (next year growth forecast: 10.25%). The company's PEG is slightly higher than Yum Brands (NYSE:YUM) at 1.4 and Sonic (NASDAQ:SONC) at 1.1, but it still represents the best fundamental name in the company, which gives extra premium.

Technically, McDonald's has sold off by -13.77% from its January high of $100.72. Now that the stock is selling off its presenting an opportunity for entry between $88-$82.50. To help us see where we should enter a trade on McDonald's we look at all the returns for the May-July option expiration time frame since 2002.

(Click to enlarge)Click to enlarge

(Click to enlarge)Click to enlarge

Above you may see that McDonald's has performed relatively well during this time period except for 2002. Thus, I've included my estimated max low using the worst return (-19%) and second worst (-5%). It's possible to see McDonald's sell off by -19% since fundamentally expectations remain too high. However, technically this stock has been so strong over the past six months that I think investors will buy shares on any attractive correction.

If you can disregard McDonald's +1 PEG ratio relative to forecast EPS growth rates and only look at the technicals, then I suggest the following option trade.

Suggested Trade: MCD - Sell Jul 20th 82.50/80 put spread (Bull Put Spread)

(Sell 82.50 Put/ Buy 80 Put)

Size - 7.5% of Option Spread Portfolio Size = (3 spreads)

Entry: Sell Limit: 0.40

Stop Loss: 1.00

Exit Price: 0.00

Max Return: 19.04%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Current Positions:

Ultra ProShares Gold (NYSEARCA:GLL) - June 15 21/22 Bull Put Spread

Price Target: Wait for spread to expire worthless

Stop loss: 0.32

CurrencyShares Euro (NYSEARCA:FXE) - Jun 15 131/132 Bear Call Spread

Price Target: Wait for spread to expire worthless

Stop loss: 0.30

Apple (NASDAQ:AAPL) - Jun 15 480/475 Bull Put Spread

Price Target: Wait for spread to expire worthless

Stop loss: 1.50

DirecTV (DTV) - Jun 15 43/42 Bull Put Spread

Price Target: Wait for spread to expire worthless

Stop loss: 0.28

Disclosure: I do not own any investments in MCD. I own short calendar spreads and bear call spread on GLL. I own an iron condor on SPY. I am short AAPL.

Charts are from finviz.com, tradingeconomics.com.

News from: www.theflyonthewall.com.

Disclosure: I am short AAPL.