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McDonald's Option Players Bet On a Post-Earnings Drop

Speculators are scooping up MCD October 92.50-strike puts today

by 10/11/2012 1:58 PM
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A growing taste for McDonald's Corporation (NYSE:MCD - 92.63) puts has been evolving in the options pits, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Specifically, MCD's 10-day put/call volume ratio has moved to 0.83, from its 50-day put/call volume ratio of 0.55. Plus, the shorter-term ratio ranks higher than 81% of similar readings taken in the past year, suggesting bearish bets have been picked up over bullish at a faster-than-usual pace in recent weeks.

The stock's Schaeffer's put/call open interest (SOIR) confirms this rising trend toward puts. Since Sept. 24, MCD's SOIR has climbed to 0.99 from 0.93, as near-term put open interest has swelled 28%. The equity's SOIR is now ranked in the 67th percentile of its annual range, indicating short-term speculators are more put-heavy than usual toward MCD.

Puts are the obvious choice among option players in today's session. Almost 6,400 contracts have crossed the tape, a 31% improvement over the average daily pace for put options. By comparison, fewer than 3,300 call contracts have traded, about half of what is expected.

The glut of today's put volume is centered on the October 92.50-strike strike, which has seen more than 4,500 contracts trade. The majority of these contracts have crossed at the ask price, and implied volatility has ticked 1.4 percentage points higher, implying that a portion of today's volume represents buy-to-open activity. By initiating these long puts, speculators will profit with each step south of $91.40 (the strike minus the volume-weighted average price of $1.10) MCD takes through next Friday. This represents a 1.3% slide from the stock's current perch.

Technically, the Dow component has had a mediocre year, with the shares shedding roughly 7.8% on a year-to-date basis. Although exhibiting some life in recent weeks -- MCD has rebounded 2.6% since tagging its month-to-date low of $90.27 on Oct. 3 -- the stock continues to stare up at its 200-day moving average. The equity has not enjoyed a daily close above this psychologically significant trendline since May 7.

MCD is slated to unveil its third-quarter earnings results before the market opens next Friday, Oct. 19, which coincides with October options expiration. Considering the stock gave back 3% in the session following its second-quarter miss, this scheduled event may be prompting the recent uptick in put activity. However, should MCD's quarterly results fail to disappoint this time around, the most the aforementioned October 92.50-strike put buyers stand to lose is the initial premium paid. Wall Street is calling for a profit of $1.48 per share in MCD's third quarter.

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