The Dow Stock to Watch Through the End of July

MCD is staring down heavy call open interest in the expiring July options series

Jul 17, 2017 at 2:46 PM
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McDonald's Corporation (NYSE:MCD) probably isn't the first name that comes to mind when you hear the phrase "momentum stock," but there's no arguing with the stock's year-to-date return of 27.6% -- making it the third strongest Dow component of the year, behind Boeing (BA) and Apple (AAPL). MCD's meteoric rise in 2017 has been underlined by its rising 20-day, 30-day, and 50-day moving averages, while its Relative Momentum Index (RMI) has been lodged north of the 70 level since February.

So it should be interesting this week to see how MCD fares around the $155 level, which is home to peak call open interest in the expiring July series (and, for that matter, is MCD's top open interest strike across all expiration series). The security's July 155 call carries open interest in excess of 18,703 contracts -- and with MCD settling Friday at $155.28, within pennies of this heavily populated strike, it's quite possible that the shares could encounter some options-related resistance here in the days ahead.

And perhaps equally compelling is the mass exodus of McDonald's short sellers in the face of the stock's breakout rally. Short interest on the restaurant chain has declined by 33% since the start of 2017, and now totals just 6.85 million shares -- within striking distance of a multi-year low. It would be reasonable to assume that some portion of the security's year-to-date surge has been supported by short-covering activity, but with less than 1% of the equity's float now dedicated to short interest, MCD would appear to be running quite low on "guaranteed" sideline cash to fuel additional upside.

And after staring down the challenge of heavy call open interest at the 155 strike next week, McDonald's will go on to report earnings before the market opens on Tuesday, July 25. The stock popped 5.6% after its April report, breaking a year-long streak of negative post-earnings returns -- most of which were fairly mild, aside from a 4.5% plunge after last July's report.

With MCD still poised atop multiple layers of technical support -- and price action still the most relevant data point for any stock analysis -- calling for the stock's imminent demise would be a bit premature. But we'd say the combination of potentially staunch overhead call resistance, alarmingly low short interest, and an imminent news catalyst should give MCD longs plenty of cause for caution over the next couple of weeks.

mcd daily price chart 0714

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, July 16.

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