Fast-food giant McDonald’s (MCD) isn’t offering a great look these days. For one thing, the company waded into a political controversy when former President Donald Trump made a cameo appearance at one of its locations in Pennsylvania. Soon afterward, in an unrelated incident, an E.coli outbreak occurred, negatively impacting its restaurants and overall image. However, I’m not bearish but Neutral, and I intend to show how traders can generate up to 34% yield through an options trade.
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The reason I’m not overtly pessimistic about MCD stock centers on positive results for the restaurant brand. During its recent third-quarter earnings disclosure, the company posted financials that came in better-than-expected. Specifically, McDonald’s sales grew by 3% on a year-over-year basis to $6.9 billion. Plus, the firm benefits from everyday convenience and relatively low prices.
However, comparable sales also slipped by 1.5%, lower than the expected drop of 0.6%. Furthermore, some analysts have advised a cautionary take on MCD stock, suggesting a forward dynamic that is neither too hot nor too cold. Fortunately, the short iron condor allows us to profit from this potentially pensive outlook.
Explaining the Benefit of the Iron Condor
Typically, retail investors take a binary approach to the market: they either bet that the underlying security marches higher (long) or slides lower (short). However, a neutral position — such as the anticipation of sideways trading following an earnings report — seemingly offers no opportunity for accruing profits. Nevertheless, the modularity and flexibility of options offers creative ways to potentially make money.
Specifically, a short iron condor allows traders who anticipate that a security will trade sideways within a defined range to receive a positive yield. Practically speaking, this trade represents a combination of a Bull Put Spread and Bear Call Spread. Both spreads represent credit-based strategies, meaning that they start from a cash inflow position and offer limited risk. This structure is known as a “Short Iron Condor” because the trader receives a net credit upon entering the position.
For a quick recap, in a Bull Put Spread, the position wins when the target security stays above a defined profitability threshold. For a Bear Call Spread, the position wins when the stock stays below a given threshold. With a short iron condor, the asset must stay within an upper and lower boundary. It’s riskier due to the two “danger” zones outside the desired range. However, for a consolidating security, the condor could be lucrative.
Defining the Wings for the MCD Stock Condor
When it comes to condor prospects for a blue-chip giant like McDonald’s, you can have hundreds of trading ideas per option chain (i.e. expiration date). So, how do you go about picking the right prospects? First, you must establish a baseline condor. This trade will feature “wings” that extend just above and below the market’s expected range of mobility.
To find this projected figure, you may conduct a stochastic calculation, which involves multiplying three metrics: the share price of the target security (MCD stock), the implied volatility (IV) of the desired options chain and the time decay adjustment (or the square root of the days to expiration divided by 365 days). Performing this exercise for MCD options expiring Dec. 20, 2024, you will get a product of $19.83.
In other words, MCD stock could potentially rise to $312.68 or fall to $273.02 from Monday’s close of $292.85. Subsequently, the iron condor setup that fits this range and offers the highest yield is the 255.00P | 275.00P || 315.00C | 335.00C trade. For putting $1,786 at risk, you could earn a premium of $214, yielding a return of 11.98%.
Adjusting Your Risk-Reward Exposure
Of course, the idea with iron condors is that — taking aside pricing inefficiencies — the greater the risk, the greater the reward. With multi-leg options trades, there are two main types of risk: first, there is the amount of capital you could lose. Second, you must consider the likelihood of success given the parameters of your position.
If you are willing to accept more of the second type of risk, you may consider much more attractive ideas. For example, you might try your luck with the 270.00P | 280.00P || 310.00C | 320.00C condor. Here, you’re only putting $748 at risk for the chance to keep $252 of income generated. If fully successful, your yield on this trade would come out to 33.69% or almost 34%.
What’s the catch? Essentially, your profitability zone will narrow. Your breakeven threshold to the upside will stand at only $312.52 while your downside breakeven will sit at $277.48. That leaves only 6.29% of margin northward and 5.54% of margin southward. If MCD stock moves beyond these borders, you may lose the entire $748. Then again, if McDonald’s consolidates, you can come away with a healthy profit.
Wall Street’s Take on McDonald’s
Turning to Wall Street, MCD stock has a Moderate Buy consensus rating based on 17 Buys, 11 Holds, and zero Sell ratings. The average MCD price target is $314.58, implying 6.56% upside potential.
Key Takeaway
With McDonald’s fundamentals presenting a mixture of give and take, it’s difficult to forecast a directional bias in MCD stock. However, if you anticipate that shares will enter a sideways consolidation, the short iron condor could be the most appropriate idea. A combination of a Bull Put Spread and Bear Call Spread, this particular condor will be profitable so long as MCD stays inside a defined upper and lower boundary.
