McDonald's Corp (MCD) reported 12.6% higher comp sales last quarter and higher free cash flow. This is pushing MCD stock higher and making it ideal for traders who short OTM puts for income.
I discussed this in my last article on May 23, “McDonald's Earnings And Comps Surprise On The Upside, Making MCD Stock A Value Buy.” Its earnings on April 25 showed that comp sales were 12.6% higher and free cash flow was 10.7% higher than last year.
This shows that the company is enjoying solid growth and traders can likely expect that this will continue, short of a recession. That is why MCD stock is rising, up over 8.6% YTD and at $287.17 today, it is up from a recent low of $281.61.
Where This Leaves Investors in MCD Stock
So far, MCD stock does not seem over-extended. For example, analysts expected earnings per share (EPS) this year of $11.10. That puts the stock on a forward 2023 multiple of just 25.9x. For 2024, the forecasts are for $12.10 per share, giving it a 2024 multiple of 23.7x.
To put that in context, Seeking Alpha reports that its 5-year average forward multiple is 26.6x. And Morningstar says the 5-year forward P/E multiple average is 25.35x.
In other words, today MCD stock's price and valuation is not out-of-line with its historical averages. That means the stock could move higher or tread water from here
In my article, I discussed taking advantage of this by shorting out-of-the-money put options to create extra income.
Shorting OTM Puts for Extra Income
For example, in our last article, we suggested shorting the $270 strike price puts for expiration on June 23. At the time the strike price was 5.5% below the spot price of $286.37 and the expiration period was 31 days away in the future. The short put traders received $1.18 per contract, which provided a yield of 0.437%, or 5.244% on an annualized basis.
Today, that strike price is trading for just 24 cents, down from $1.18, with just 11 days until expiration. That means that the trade has been a success and it is likely to expire worthless unless for some reason MCD stock falls over 6% from here.
Note that MCD stock has not moved that much today at $287.17 from the price of $286.37 when the trade was entered. This is why shorting OTM puts works so well for generating extra income for traders if the stock is not expected to move that much.
As a result, some traders may want to initiate a new short put trade in MCD puts. For example, the July 7 expiration period, 25 days from now, shows that the $275 strike price puts trade for 77 cents.
This means that if a trader secures $27,500 with their brokerage firm in cash and/or margin, they can enter an order to “Sell to Open” 1 put contract at $275.00. The account will immediately receive $77.00. That works out to a quick yield of 0.28% or 3.36% on an annualized basis, if the trade is repeated 12 times a year.
So you can see this is an easy way to increase one's yield in the stock, as well as a way to potentially buy in at a lower price (should the stock fall to $275.00 on or before July 7). As a result, investors can significantly enhance the 2.12% dividend yield that MCD stock presently gives long holders of the stock.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
