Blue Chip Flashing 'Buy' Before Earnings

An earnings win next week could shock MCD options buyers

Andrea Kramer
Apr 27, 2018 at 10:51 AM
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Fast-food titan McDonald's Corporation (NYSE:MCD) is slated to report earnings before the opening bell on Monday. While the shares of the blue chip have struggled in 2018, the stock could be sending up a "buy" signal before earnings, if recent history is any indicator.

McDonald's stock recently pulled back to within one standard deviation of its 320-day moving average, after a lengthy stretch above this trendline. After the previous four pullbacks to this trendline, MCD stock went on to average a one-month gain of nearly 6%, according to Schaeffer's Senior Quantitative Analyst Rocky White.

At last check, MCD shares were slightly lower, down 0.1% at $158.72. The equity has given up 7.6% in 2018, but has found support in the $155-$156 area. Another 6% pop after earnings next week would place the Dow stock around $168.24 -- territory not charted since before the early February stock market correction.

MCD stock chart

McDonald's stock has moved higher after three of the last four earnings reports, gaining 5.6% the day after its earnings release a year ago. On average, MCD shares have moved 2.4% the day after the company's last eight earnings reports, regardless of direction. This time around, the options market is pricing in a slightly bigger-than-usual move of 3.7%, per at-the-money implied volatility data.

As far as direction, though, it looks like the MCD crowd is betting bearishly. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the blue chip has racked up a 10-day put/call volume ratio of 1.50 -- in the 95th percentile of its annual range. In other words, options buyers have been initiating bearish bets over bullish at a much faster-than-usual clip during the past two weeks. Should McDonald's report strong earnings next week, a mass exodus of option bears could propel MCD higher.

 


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