McDonald's Traders Bet on an Earnings Win

Schaeffer's Investment Research
  APR 17, 2013 3:05 PM

MCD's May 105 call saw buy-to-open activity on Tuesday.

 


McDonald's (NYSE:MCD) is scheduled to unveil its quarterly report on Friday, and yesterday's option players expressed optimism ahead of the results. Around 10,000 calls traded throughout the course of Tuesday's session, representing a 65% mark-up to the average daily volume. The lion's share of attention was centered at MCD's May 105 call, where 7,811 contracts crossed the tape for a volume-weighted average price (VWAP) of $0.87. The majority of these out-of-the-money calls went off at the ask price, and open interest added 5,580 positions overnight, pointing to buy-to-open activity.

By purchasing these calls, traders expect McDonald's to tackle the $105 mark by the close on May 17, when back-month options expire. More specifically, the options will begin to see a profit once MCD moves north of $105.87 (strike price plus the VWAP), or 2.7% above the stock's current perch at $103.04. This breakeven mark resides in uncharted territory for the stock. At last night's close, delta for the call was docked at 0.35, suggesting a 35% chance the option will land in the money by expiration. Should MCD fail to topple the strike price over the next five weeks, the most yesterday's traders stand to lose is the initial premium paid.

On the charts, McDonald's has put in a solid performance since hitting an annual low of $83.31 on Nov. 16, with the shares up nearly 24%. Highlighting this technical prowess has been the stock's 10-week moving average, which has helped usher MCD aloft since early December.

As mentioned, McDonald's Corporation's will reveal its first-quarter earnings results ahead of the open on Friday. The company has a mixed history in the confessional, and has matched or exceeded analysts' bottom-line estimates in two of the past four quarters. For MCD's first quarter, Wall Street is calling for a profit of $1.27 per share.

This article by Karee Venema was originally published on Schaeffer's Investment Research.

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