2 Olympic Sponsors Presenting an Options-Buying Bargain

Dow components McDonald's Corporation (MCD) and The Coca-Cola Co (KO) are two of the largest sponsors for this year's Olympics

Aug 4, 2016 at 1:06 PM
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The Olympic Games are set to officially kick if in Rio with an opening ceremony tomorrow night. With eyes from around the world focused on the competition's 306 events, major sponsors -- including fast food firm McDonald's Corporation (NYSE:MCD) and beverage stock The Coca-Cola Co (NYSE:KO) -- are likely hoping for a boost. But no matter if the games translate into upside for the two Dow components, both are presenting an attractive opportunity for short-term options buyers.

MCD has been slumping since its recent quarterly earnings miss, and is currently sitting just a hair shy of its year-to-date breakeven level, trading at $118.41. In the meantime, it looks like the shares may have found a foothold above their 50-week moving average. Longer term, the $116 level has also been limiting the stock’s pullbacks.

The shares hit an all-time high in May, but 14 out of 23 analysts still rate MCD a "hold" or worse, and the average 12-month price target of $130.29 sits below that record peak. This leaves the door wide open for future upgrades or price target hikes, which could create tailwinds for the stock.

It appears traders have already begun taking a more upbeat view of MCD. Short interest fell by 26.2% during the two most recent reporting periods, but these pessimistic bets still account for nearly four days' worth of trading at the stock's typical daily volume, meaning the shares could get a boost if bears continue to back off.

Options traders have been taking a more bullish approach, too. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio now sits near the top quartile of its annual range, at 1.25 -- up from 0.86 two weeks ago. And now is an attractive time to pick up MCD's short-term options, per the stock's Schaeffer's Volatility Index (SVI) of 14% -- in the 9th percentile of its 12-month range. Plus, the equity's 30-day at-the-money implied volatility (ATM IV) of 14.1% sits lower than 98% of the past year's readings. This data shows that premium on McDonald's Corporation's near-term options is pricing in historically low volatility expectations at the moment.

After pulling back from its April record high, KO finds itself in a very similar situation to MCD. The shares have yet to recover from their post-earnings slip, but have seen long-term support at their rising 320-day moving average. KO is up 1.2% yea-to-date, at $43.49, but the overhead $46 level has been causing trouble for the shares in recent months.

Like MCD, KO could stand to benefit from bullish attention among the analyst crowd, where nine out of 15 recommend holding or selling the stock. Short interest on the equity has also been falling in recent months, and options traders have significantly changed directions in recent weeks. Across the ISE, CBOE, and PHLX, KO's 10-day call/put volume ratio of 3.68 ranks higher than 92% of the past year's readings -- and represents a significant climb from a reading of 0.37 two weeks ago.

KO's near-term options look to be even more attractively priced, from a volatility perspective. The stock's SVI of 11% and its 30-day ATM IV of 11.6% each rank in the bottom 1% of all comparable readings taken in the last 12 months. So with The Coca-Cola Co (NYSE:KO) set to enjoy a surge of advertising exposure in the coming weeks, it may be a great time for bargain-hunting options buyers to strike.

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