Put Selling is a strategy that is often about opportunity. Events like a stock dip or earnings warnings or as in the case of McDonalds Stock today, disappointing earnings. While McDonalds Corp still saw its third quarter profit up 6% to $1.52 a share which was better by 1 cents over estimates, sales only rose 2% to $7.32 billion which was shy of the expected $7.34 billion. McDonalds stock first opened up with a drop and then stabilized. McDonalds
McDonald’s Corp. MCD -0.89% just had one of those quarters and warned investors it might come up empty-handed again in the next one.
McDonald’s reported Monday its third-quarter profit rose 6% from a year ago to $1.52 a share, a penny better than Wall Street expected. Sales rose 2% to $7.32 billion, missing the $7.34 billion analysts expected. The problem is McDonalds Corp is now a global entity and its rare when every part of the globe is firing on all cylinders. The past quarter saw sluggish growth in the Middle East, Africa and Asia-Pacific with a special focus on the decline of revenue in China. Europe and the US were up slightly.
While McDonalds CEO Don Thompson called the global environment “challenging” and warned that the fourth quarter will probably see comparable sales performance, a lot of analysts pointed to his comments as indicative of the global economies slowing. They could be right or it could be that McDonalds continues to saturates its markets. As well statistics show that when economies improve many consumers move to more upscale restaurants. Whatever the case McDonalds is still the fast food giant but this disappointed earnings brings more opportunities for profits within McDonalds Stock.
Put Selling against McDonalds Stock Support Levels
For 2013 you can see that McDonalds Stock peaked back in April. Investors were pretty enthused about McDonalds Stock at the start of 2013 and bid the stock into overvalued territory. With stock over $100 the PE alone was over 20 times. Not only too high for McDonalds Stock but historically too high as well. Revenue would definitely have to keep increased between 1.5% to 2% monthly to support valuations above $100 and that is not going to happen. McDonalds Stock represents a mature company that has filled market places pretty well everywhere with the famous Golden Arches. To continue to see this kind of growth they would have to expand rapidly in areas like China which is not happening as of yet.
The stock has since April been declining and this has created some excellent Put Selling opportunities this year. During the first pull back of the stock I was selling the $95 puts. Now I am Put Selling the $92.50 puts. The chance of McDonalds Stock seeing $100 again by year-end is very slim. Next year the company must see better growth out of China, India, Japan, the Philippines and Korea. That will be a tall order.
The Outlook For Put Selling Success in McDonalds Stock
When it comes to Put Selling any stock, big cap or otherwise, it is important to have a goal and a plan to reach that goal. My goal is to earn a minimum 12% a year from McDonalds Stock but I have not interest in owning shares. The plan for me has always been to be Put Selling the trading range McDonalds Stock was in and keep bringing in monthly profits. I have never had a problem earning 12% on McDonalds Stock. To that end it is important to understand where a stock like McDonalds Stock could be heading if it continues to disappoint on the revenue side.
The 3 year chart below shows that the $100 level was reached back in late 2011 and early 2012. The stock then fell first down to around $92.50 and then $90 and finally stopped falling at $85. I would expect the same trading range could again develop.
Both $90 and $85 valuations have reasonably good support. This means selling the $92.50 puts at present make sense.
Understanding Put Selling As Part of A Plan
When Put Selling against stocks, many investors simply find a stock they like, pick a strike and sell puts. They then wait hoping it works in their favor or they end up with shares and will try to figure something out at that time.
When I sell puts there is a plan and a strategy behind it. McDonalds Stock at present, is a good example. The 3 year chart shows the stock could and probably will drift down to $90.00. From there if it breaks support the next level is $85.00. This could take weeks to months or it may never happen. But knowing what “could” happen allows me to prepare my present trades to continue to profit in a stock but at the same time prepare to also protect my position from losses.
When I did my $92.50 trade last week, I earned $1.33. That means my break-even is $92.50 less $1.33 earned = $91.17. I am just $1.17 short of the $90.00 valuation. Therefore if the stock drifts down to $90 by November 16, I know the cost to buy it back close to options expiration will be about $1.20 to $1.25. When I sold my $92.50 puts, McDonalds Stock was trading at $93.55. It was trading $1.05 higher than the put strike price I sold.
If volatility stays about the same as where it was on Oct 15 when I sold my Nov 16 puts, this means that by Nov 16 if McDonalds stock is at about $91.17, the $90.00 put strike for December should be worth about $1.20. To calculate it out figure on the stock at $91.17, then deduct the put at $90 = $1.17. I earned $1.33 but the stock was $1.05 higher than the $92.50 put strike sold. At $91.17 the stock will be $1.17 which is 12 cents higher. This means the option for December as long as volatility has not changed, will be trading for roughly $1.20.
If by Nov 16 the stock is at $91.17 and I want to roll down, it will cost me $92.50 less $91.17 = $1.33 plus perhaps 5 cents more for a cost to close on Nov 16 at $1.38.
If I can then sell the Dec $90 put for $1.20, I am going to have a net debit of $.18 cents. This means in the event of a decline in McDonalds Stock to $91.17 I have actually lost money. My capital has not been working for me. It was tied to a trade that produced no return.
But by knowing the information above I now know that if I have to roll down around that time (Nov 16), I will consider selling additional puts to make sure the trade remains profitable for the roll down. I also know from the information above that a rally back in the stock should be looked at closely for an opportunity to close the trade early and lock in profits.
A Plan for McDonalds Stock
By studying chart patterns and looking at volume to determine possible outcomes I already know far in advance what my strategy would be in the event the trade fails. I know how much extra capital I may need whether by cash or margin, and I know what the next strike level would be to sell at. I know where the next support levels are and the likelihood of them breaking and what might occur when they break. All of this is known in advance of even making the initial trade and it takes only minutes to determine them. It is what allows my capital to always be working in my favor and adding profits to my portfolio.
Put Selling successfully is about having the goal in place, the plan ready and the strategies that will be used to reach the goal. It doesn’t take much work to establish clear goals, but most investors still continue to try to invest without them. Without a goal and plan, it is very difficult to consistently earn income and compound a portfolio.
Breaking Even Is Still A Losing Trade
Even breaking even on a number of trades may seem like the “trade worked out” when a stock falls, but in fact the trade did not work out. The capital was tied to a trade that produced no return. Capital that could have been used to earn income and compound the portfolio was not working.
In my strategy above I will be earning income continuously even if McDonalds Stock declines. My capital will be working from the moment it enters the trade. I have no plans to “break-even”. I only have a plan to reach my goal and for that to happen my capital has to be working for me all the time. That cannot happen without a goal and a plan.
McDonalds Stock Internal Links
Review McDonalds Stock Trades For 2013
Review McDonalds Stock Trades For 2012
Review McDonalds Stock Trades For 2011
Review McDonalds Stock Trades For 2010
Review McDonalds Stock Trades For 2009
Review all articles about McDonalds Stock
Review all Members only articles about McDonalds Stock