Pre-Earnings Optimism Builds in McDonald's Corporation (MCD) Option Pits

Dow component McDonald's Corporation (MCD) has had a string of bad luck in the earnings confessional, with the Big Mac maker slated to report Monday morning

Jan 20, 2017 at 2:24 PM
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Big Mac maker McDonald's Corporation (NYSE:MCD) is headed to the earnings confessional bright and early Monday morning, and options traders seem to have high post-earnings expectations for the Dow stock. The shares are marginally higher at $122.24 today, but history suggests MCD could follow this casino stock lower as next week begins. In fact, the blue-chip stock has moved to the downside in the session following its earnings report in five of the eight most recent quarters, including the past three in a row.

The analyst community, at least, appears prepared for a repeat performance. At present, over 65% of brokerage firms recommend holding or selling MCD stock. But that seems to be where pessimism toward the food stock ends. For example, short interest on MCD fell by more than 16% during the two most recent reporting periods, and now represents just over 1% of the equity's available float.

Options traders have been busy targeting MCD calls in recent weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative players have bought to open 1.27 calls for each put over the past 10 sessions -- a reading that ranks in the 74th percentile of its annual range. Meanwhile, MCD's gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.52 indicates call open interest nearly doubles put open interest among near-the-money options in the front three-months series.

Drilling down, the March 125 call has seen the biggest rise in open interest over the past 10 sessions, with 6,753 contracts added. More than 10,200 contracts currently make up open interest here. Data from the major options exchanges indicates the bulk of these calls have been bought to open, as speculators bet on a breakout above $125 by expiration at the close on Friday, March 17.

Meanwhile, MCD is presenting a surprisingly good bargain for options buyers ahead of Monday's earnings report. With a Schaeffer's Volatility Index (SVI) of 18% -- in the low 30th percentile of its 52-week range -- the security's near-term options are pricing in relatively muted volatility expectations at the moment.

From a technical standpoint, optimism among traders makes some sense. After all, MCD shares have been powering higher since October, and have found a solid foothold atop the rising 50-day moving average -- a trendline that led the stock lower through much of 2016. However, McDonald's Corporation (NYSE:MCD) is still staring up at the $123-$124 region, which corresponds with a 61.8% Fibonacci retracement of last year's highs and lows.

MCD Daily Chart January 20

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