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Bullish Traders Show an Appetite for McDonald's Calls

MCD sees an influx of front-month call activity

by 12/7/2012 9:42 AM
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Bullish bettors flocked toward McDonald's Corporation (NYSE:MCD - 88.86) yesterday, as roughly 34,000 calls crossed the tape during the course of the session. This was triple the equity's average single-session call volume, and more than double the number of puts exchanged. What's more, the stock's Schaeffer's Volatility Index (SVI) of 13% ranks higher than just 21% of other such readings taken within the past year. In other words, MCD's front-month options are relatively inexpensive at the moment, providing an ideal entry point for the security's optimistic speculators.

Digging deeper into the data, it appears that Thursday's traders favored the December 87.50 strike, where around 7,500 calls traded at a volume-weighted average price (VWAP) of $1.13. The bulk of these contracts changed hands at the ask price, pointing to buyer-fueled activity. This strike saw an overnight rise in open interest of more than 5,000 contracts, making it safe to assume that new positions were implemented here. By purchasing these calls to open, speculators are counting on the shares to muscle north of $88.63 (strike price plus the average premium paid) by the time front-month options expire.

This penchant for bullish options over bearish is a stark contrast to MCD's current trend. The equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.82 is just two percentage points shy of a pessimistic peak. In other words, options players have been snapping up puts over calls at a near annual-high pace in recent months.

Similarly, Schaeffer's put/call open interest ratio (SOIR) for MCD checks in at 1.22, with puts outnumbering calls among options with a shelf-life of three months or less. This ratio resides in the 87th percentile of its annual range, indicating near-term traders have been more put-heavy toward the stock just 13% of the time during the past year.

However, most of the brokerage firms covering the popular burger chain have high expectations for MCD. The stock has received 10 "strong buys" and three "buy" endorsements, compared to 11 "holds," and not a single "sell" recommendation in sight. Also, the equity's average 12-month price target of $96.80 reflects expected upside of about 10% to yesterday's closing price of $88.09. What's more, just this morning analysts at Janney upgraded MCD to "buy" from "neutral," citing signs of stronger-than-anticipated U.S. same-store sales last month.

From a technical perspective, MCD has shed around 12% year-to-date, and about 9% during the past year. Still, thanks to Thursday's 1.3% climb -- as well as this morning's 0.9% spike -- the stock is poised to finish the week above its 10-week moving average for the first time since early October, and yesterday's bulls look on their way to gains.


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