McDonald’s Corporation (NYSE:MCD) dived nearly 5% this week, but it is only the start of a long slide that option traders are looking forward to in the coming months for the golden arches. According to an article on Barron’s, a very profitable options strategy has developed on the market to take care of the upcoming slide in the company’s stock price.
The strategy involves buying the $90 put, that has an expiration date of February for $2.12. This will be partly financed by selling the $85 put on McDonald’s Corporation (NYSE:MCD)stock, that was bid at 75 cents when the stock was trading at $91.49. The strategy has a maximum payoff when the stock price of the is at $85, or falls below that level. This profit amounts to $3.63. We attain this by subtracting $1.37, which is the net cost of setting up this strategy, from the $5 profit we attain from the put option.
Now let us explore why McDonald’s Corporation (NYSE:MCD) trading below the $85 mark in February is a very real possibility. According to the article the shift in the consumption pattern to a more healthy diet is costing this once fast food blue chip stock the most. Apparently, Big Mac is no longer appetizing enough to make people make an unhealthy choice, when it comes to eating out.
Although the company is wowing to gear towards a turnaround, but even if that happens, it is not just going to come overnight. It will take time, and this is exactly what the money nowadays doesn’t have. Investor’s have much better prospects of higher returns in other investments than McDonald’s Corporation (NYSE:MCD). This in turn will pressurise the stock price even more to the down side.
The article correctly pointed out that even though institutional investors have a long term horizon for their investments, but they still have to report their progress on a quarterly basis, and McDonald’s Corporation (NYSE:MCD) is going to considerable cut into it if it were to stay in their portfolios.
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