McDonald's continues to languish below declining 21- and 50-day moving averages and is a short-sale position in Leaderboard.
Traders looking for a bearish option trade could look at a bear call spread on McDonald's stock.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
McDonald's Stock Bear Call Spread
A July-expiry bear call spread on McDonald's using the 265-270 strike prices can be sold for around $0.80.
Traders selling the spread would receive $80 in option premium, which is also the maximum possible gain. The maximum loss would be $420.
The spread will achieve the maximum profit if McDonald's stock closes below 265 on July 19. In this case, the entire spread would expire worthless, allowing the trader to keep the $80 option premium.
The maximum loss will occur if McDonald's closes above 270 on July 19. That would see the premium seller lose $420 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. That means you always know the worst-case scenario in advance.
Managing McDonald's Stock Trade
A stop loss could be set if McDonald's trades above 260, or if the spread value rises from $0.80 to $1.60.
Because this is a bearish position, traders who think the stock could move higher from here should not enter this trade. The position starts with a delta of -9, meaning it is roughly equivalent to being short nine shares of McDonald's.
According to the IBD Stock Checkup, McDonald's stock is ranked No. 24 in its industry group. It has a Composite Rating of 56, an EPS Rating of 81 and a Relative Strength Rating of 20.
McDonald's is due to report earnings around July 25, so this trade should have no earnings risk if held to expiration.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
