As consumers continue to remain selective with their spending and cracks start to show within the consumer discretionary sector, one name that is worth paying attention to is McDonald’s (MCD) . As the largest fast-food chain, McDonald’s has seen better days, shedding over 17% of its market value over the past 3 months as it declined from nearly $300 to its current level around $250. As a trader, one could look at McDonald’s stock and see that the trends are bearish with negative momentum. MCD 3M mountain MCD 3 months But I prefer to view this from a contrarian perspective. Having declined significantly over the past few months, this has become an opportunity to be a buyer of this blue chip at a cheaper valuation and play for a bounce. If we take a closer look at the chart, MCD has over the past two weeks continued to print lower low’s in price, but momentum has diverged with this and showing signs of exhaustion on this selloff. (The chart above shows the Commodity Channel Index indicator in the lower panel, which looks at the current stock price vs. its historical average price and is used by technical analysts to determine a trend change.) Couple this with the fact that MCD now trades at just above 20 times forward earnings, which is about a 15% discount to its historical average relative. And given its continued push into digital penetration with mobile ordering and delivery, MCD is expected to growth topline revenue by nearly 10% this year after a flat 2022. This will likely help MCD maintain its operating margins in the low 40%’s and defend its valuations from further contraction. The trade Due to the nature of this trade, where I’m attempting to buy a stock in a clear bearish trend, my preference is to reduce my risk by using options. I typically look for the trade to work in my favor with a bounce fairly quickly by using a call vertical spread to reduce my overall risk while providing a risk/reward that is nearly 2 to 1 if my view is correct. I’m looking to purchase the Dec $250/$270 call vertical. Buying the Dec $250 call option on MCD for about $8.30, while selling the $270 call for $1.45, paying a net debit of $6.85. This strategy will risk $685 per contract if MCD is below $250 at expiration, while paying a maximum reward of $1,315 if MCD is above $270 at the December expiration, a risk/reward ratio of 1.9x. DISCLOSURES: Zhang is long McDonald’s Corp. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
