McDonald's) has been less than a star performer as of late. So, let's consider a short iron condor options trade in McDonald's stock.
Earnings season is now in full swing. As prices get a little more volatile intraday, I am looking to post earnings-reaction trades. As a side note, although the VIX (Cboe Market Volatility Index) remains low, it has been rising.
A rising VIX does not always mean lower prices. But it can often mean that less buying will appear at prior support levels.
For example, consider the price action at support levels in the S&P 500 (perhaps near 5,400 for now) and Nasdaq 100 (19,000) and its tracking ETFs over the past couple of days.
For the trade in McDonald's stock today, I would like to focus on theta decay. Theta refers to the time value of an option. So, selling an iron condor with time on our side means we stand to close this position with about 20 days left to expiration.
I feel certain that is not likely to change in this trade, even as the burger chain juggernaut brings back the $5 value menu.
The key in this trade? The recent fade is nowhere as sharp as highfliers in the stock market today. So, we do see a measure of steadiness that works well for the short iron condor.
McDonald's Stock Today: Structuring The Trade
A short iron condor is the combination of a short call spread and a short put spread. The goal? Collected theta decay without a large move in the stock price — over a time frame of less than 60 days in this case.
Let's set up the short iron condor for McDonalds stock this way:
- Sell to open 1 MCD Sept. 20-expiring 270 call option
- Buy to open 1 MCD Sept. 20 275 call
- Sell to open 1 MCD Sept. 20 235 put option
- Buy to open 1 MCD Sept. 20 230 put
The short iron condor in McDonald's stock will give us a credit of $1.48, based on recent trading, or $148 per set of contracts.
The total risk is the difference between the strikes and the credit collected. In this case, $5 minus $1.48 = $3.52.
Why would I risk $3.52 to make $1.48? Because the probability of making $1.48 is much higher than losing $3.52. On top of that, we do not want to hold this to expiration. We only want to collect 30 days of theta decay. Thus, this strategy would give us about a 25% return on our position.
The trade in McDonald's stock allows us three choices to exit the trade. One, we see prices stay within the range. We then close the position with 20 days or less to expiration.
Two, we see prices expand outside the range and we close the position at our predetermined risk event. And finally, we hold the position into its expiration and collect much or all of the credit. This is the riskiest play but delivers the greatest reward.
Let's now identify key levels of support and resistance.
Current weekly support is between 230 and 235 while weekly resistance is between 270 and 280. This is where to position the short strikes with a little bit of a bearish slant. Why? I expect prices to lag and not breach 280.
Scenarios
If the price action in McDonald's stock is quiet and choppy between 235 and 270, it gives us the ideal landscape for maximum profit. This does not mean that prices won't move outside this range. But if they do, they will fade back into the range. This allows us to get back to our plan and leave with a 25% return or better, before leaving the trade with 20 days until the options expire.
Now, what happens if the price action moves out of the range, then does not return into the range within 3-4 days? This will boost risk. We leave the trade.
As with any trade, carefully consider your risks before entering.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on X at @AnneMarieTrades
