Schaeffer's Trading Floor Blog

McDonald's Corporation (MCD): A Favorite Among Option Bulls

Exploring the speculative crowd's recent MCD call buying

by 5/21/2014 7:25 AM
Stocks quoted in this article:

Lots of news on McDonald's Corporation (NYSE:MCD) yesterday. And, well, most of it had to do with their new "old" mascot named "Happy":

New McDonald's mascot, Happy

Apparently "Happy" has been terrifying French kids since 2009, but we're only getting him here now. But hey, this will get us all to associate "McDonald's" with "Healthy Food" now. By the way, who finished off my fries?

The stock itself has certainly acted quite well in 2014.

Daily chart of McDonald's Corporation (MCD) since January 2014
Chart courtesy of StockCharts.com

And as Bloomberg notes, traders love them some MCD calls lately:

Calls betting on a 10 percent increase in McDonald's shares cost 0.59 point more than puts protecting against a similar drop, three-month contracts show. In the past three years, the calls have been an average of 4.55 points cheaper than puts, data compiled by Bloomberg show.

I believe the 0.59 and 4.55 measures refer to implied volatility well, the 4.55 certainly does. Whatever the case, the mere fact that out-of-the-money (OTM) calls are priced higher than equally OTM puts is unusual. And totally consistent with the fact that relative put demand in MCD has gone the way of their line of Angus burgers.

McDonald's Corporation (MCD) put call open interest ratio

Generally speaking, option volume isn't as good a contra-tell when it's consistent with the direction of the underlying. In other words, if put demand exploded while the stock rallied, it's a pretty good sign that everyone expects the name to top. And on the margins, that means the rally probably continues. But relatively high call demand during a rally is somewhat expected.

However wow, that's some complacency. McDonald's is not a volatile name. Its 10-day realized volatility is about 10.5 now, pretty much a normal reading in here. So it's not terribly likely to implode overnight. But the fact that literally no one seems to worry that MCD will could be worrisome from a broader perspective.

The company is as good a proxy as any for the type of stock that has outperformed in 2014. It's huge, it has slow-and-steady growth, and I'm pretty sure I've never heard the words "McDonald's" and "momentum stock" in the same sentence (setting aside that I just used them in the same sentence). Of course, market trends don't last forever. At some point, eventually, I'd expect either the faster-moving names to take the reins again, or that the ugliness in momentum spreads somewhat to big-cap. Neither condition is great for the MCDs of the world.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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