Stock Options To The Rescue! McDonald’s (MCD)

| July 26, 2012 | 0 Comments

MCD OptionsToday we’re looking at an option trade on McDonald’s to increase your profits and generate some cash after the stock dropped this week. 

Here’s what happened…

McDonald’s (MCD) shares are down 4% this week.  The shares have fallen $3.50 to around $88 after their earnings fell short of estimates and they said they’ll likely miss their full-year operating income growth target.

Here’s the deal…

The fast food giant’s EPS are down 3 cents to $1.32 from the same quarter last year.  They fell short of analysts’ estimates of $1.38 per share.

Sales grew 0.2% year-over-year.  And revenue came in at $6.92 billion, meeting Wall Street expectations. 

Here’s the kicker…

It was a rare earnings miss for McDonald’s.  But it could be a sign of things to come.

Right now, MCD is under pressure on multiple fronts.  Same store sales growth is slowing.  A stronger US Dollar slashed 7 cents per share off of their foreign earnings.  And input costs are rising as grain prices soar due to a drought in the Corn Belt. 

Look, MCD could overcome any one of these headwinds individually.  But taken as a whole, they spell trouble.

Going forward, MCD will have trouble delivering the growth they need to drive the stock higher.  But that doesn’t mean the stock is set to fall.

MCD is fairly valued and they pay a $2.80 dividend to boot.  Their annual dividend yield of 3.18% will likely keep income starved investors from selling MCD.

Put simply, it looks like MCD could be settling in for a period of range bound trading.

Here’s what to do now…

Let’s assume you bought 100 shares of MCD at $92 before earnings.  Your $9,200 investment is worth about $8,804 today.  A loss of about 4%. 

But in this slow growth/low interest rate environment, companies that pay a solid dividend are one of the safest places for investors to put their money.

Instead of pulling the plug on your MCD investment, take a look at increasing the amount of income you can generate by selling a covered call.

Selling the MCD December $95 call option for $1.12 is a great way to generate some additional income.

Remember, when selling call options, you immediately collect the premium.  In this case, it’s $112.  And you’ll collect an additional $140 in dividends over the second half of the year.

If MCD is above $95 in December, your 100 shares of MCD will be called away or sold for $9,500.  You’re out of the stock with a $300 gain on the stock.  But you’ll also collect $262 in option premium and dividends.  That’s good enough for a solid 9.5% profit.   

However, if MCD is below $95 when the option expires in December, the call expires worthless.  You get to keep the stock, the option premium, and the dividends. 

What’s more, if your stock isn’t called away, then you can sell another call and collect another premium.  Plus, you’ll continue to collect additional dividends as long as you own the stock.

The bottom line is selling covered calls against your MCD stock will increase the amount of income you can generate.  And that could be one of the best investments investors can make in this environment.

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Good Investing,

Corey Williams

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Category: Stock Options To The Rescue!

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.