McDonald's has had a rough 2024 so far. Therefore, this column will highlight a simple bearish trade in MCD stock by going long with a put.
"Americans are choking on surging fast food prices," lamented a CNBC article, which cites the price of a McDonald's quarter pounder with cheese has more than doubled over the past 10 years.
In the meantime, MCD stock has truly struggled. Shares have slumped as much as 11.4% year to date. The stock holds a rotten 22 Relative Strength Rating on a scale of 1 to 99.
McDonald's also recently got added to IBD Leaderboard as a potential short sale candidate.
Despite fast food prices outpacing baseline inflation, companies have managed to pass these increases on to consumers rather effectively. However, with many customers, particularly those with low to middle incomes feeling the strain, this trend could pose challenges for fast food businesses, especially as costs, particularly related to labor, continue to rise.
MCD Stock Today
Despite the S&P 500 increasing as much as 10.4% this year, MCD stock has fallen over 7% in the same period.
First quarter results issued on April 30 showed earnings of $2.70 a share. That missed the consensus analyst estimate by 2 cents. Sales of $6.17 billion rose 5% and met expectations.
In addition to rising costs, McDonald's is facing challenges in the Middle East, with many consumers boycotting the brand due to its perceived support for Israel.
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A Put Option To Profit
For investors anticipating more downside in McDonald's stock, purchasing a put option can effectively express this view while limiting risk.
With MCD stock recently trading below 274, investors can consider buying a 275 put with a July 19 expiry. The put option recently cost $6.80 per contract. This trade translates to a maximum loss of $680 per put contract if MCD stock trades above 275 upon expiry.
If McDonald's shares fall substantially, gains are unbound. Put another way, this trade in MCD stock could hit multiples of the original investment.
The current implied volatility of the July 19 option is 13.5%, which might indicate that this option is relatively inexpensive. Why? McDonald's stock has realized annualized volatility of 20% and 16% over 30 and 200-day periods, respectively.
With McDonald's trading in a flat base but swimming below its 50-day moving average and the 200-day line, using the 275 strike can express the view that the stock will face resistance at these levels.
Another trading advantage of simply buying a put? As opposed to shorting shares, if an investor is wrong, the most one can lose is the premium on the option.
