DOW, MCD Options – Unusual Trading Activity – December 28, 2012
This week we’re taking a look at unusual options trading activity in The Dow Chemical Company (DOW) and McDonald’s (MCD).
As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason…
Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week:
The Dow Chemical Company Options (DOW)
The largest US chemical company is experiencing a large amount of option activity this week. At least one trader thinks DOW has reached a top and is going to move lower in the weeks ahead.
Since reaching a low of $27.45 in mid-November, DOW has made a furious comeback. It gained 20% to hit a high of $32.95 a few weeks ago.
But the rally is showing signs of running out steam…
The chart of DOW shows a double top. This chart pattern is a bearish reversal we’ll often see right before a stock begins moving lower.
To profit from DOW moving lower, one trader bought 2,500 of the February 2013 $30 puts for $0.69 and sold 5,000 of the February 2013 $28 puts for $0.33.
The trader is using a vertical spread called a ratio spread. This trade was made by selling twice as many of the lower strike puts than they purchased of the higher strike puts.
The advantage of using this type of strategy is the low cost. The sale of the lower strike puts offsets the cost of the higher strike purchase. This trade only cost the trader $7,500 or about $3.00 per contract to put on.
The trader will make the most money if DOW is trading for $28 when the options expire in February. However, if DOW is below $28.00 per share, the trader will be assigned 250,000 shares of the stock.
This looks like a great trade to me.
Don’t forget, $28.00 is a strong level of support. It’s where DOW’s last rally began and it’s unlikely to fall below this level in the next few months.
McDonald’s Options (MCD)
Call volume on McDonald’s (MCD) outpaced put volume on MCD by more than 3 to 1 yesterday… an indication traders are turning bulling on the fast-food giants stock.
Shares of MCD are currently trading for $88.27. The shares are up nearly 7% since November but they’re still down 10% from the 52-week high of $99.05.
According to our tracking system, option traders bought more than 7,500 of the March 2013 $92.50 calls. The contracts were purchased at around $0.83.
The call buying indicates the trader is expecting significant upside in MCD over the next few months. In order for the trader to breakeven, MCD need to rally nearly 6% to $93.33. And it needs an even bigger rally to turn a profit.
In other words, the trader thinks MCD is going to retest the highs it made earlier this year. If not, the trader stands to lose their entire investment.
I think the bullish call on MCD is misguided.
Don’t get me wrong, MCD is a great business. But they face difficult comparisons to very strong quarters last year.
Revenue growth is slowing, margins are shrinking, and EPS are expected to grow a meager 0.5% this year. That’s a far cry from the company’s performance last year that drove the stock to the recent highs.
Unfortunately, I don’t see MCD reversing these trends any time soon. And it will likely keep MCD’s share price beyond the option expiration date.
More Options Ideas…
That wraps up this week’s unusual options trading and volume…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
