Exploring the Options Trade on McDonald’s

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Sept. 19 (Bloomberg) -- In today's "Options Update," Bloomberg's Julie Hyman and Alan Knuckman, senior market analyst at Trading Advantage, examine the options trade on McDonald’s in "On The Markets." They speak on Bloomberg Television's "Lunch Money."

Of stall out here.

You don't think it will go much higher than it is right now, at least that's not the bet you're making.

Well, modestly higher.

Not talking about tesla or anything like that.

We're talking about mcdonald's, which i'm loving at these levels.

Key level of support, the halfway mark at the 84 lows to the 104 highs, so we're 5% off these highs.

So it's a nice discount and you can lean on that 94. what i'm looking to do is buy a march call option.

In the money call, so i can buy a march 90 call to 750 in the money and it costs 850 right there.

So i'm paying a dollar for time and i've got six months for good things to happen.

The target is 114, so that option would more than double, that option would gain 125%, even with only a modest move in the stock up to 114. now, the price you're paying on this i believe is 9:50, which ss options go is pricy, because it is so deeply in the money, we're talking about a $90 option.

So you're paying up here for a pretty conservative bet.

Paying for safety essentially.

Exactly.

Typically when you're in the options buying business, the more money you pay, the more probablity.

So this is all intrinsic value.

Instead of waiting for the market to go down, this option gives me the right to be long for $90. right now the stock markets come off, so now it's about 8.50. $750 in the money, and so there's only one dollar of that time component.

So it will move like the stock, that's what i'm looking for here with that.

You get what you pay for when you're an options buyer.

This has a high delta, meaning a high probablity of being into money and that's what i'm talking about.

So let's talk quickly about the possibility that it's not in the money at expiration that it does fall lower.

I mean, mcdonald's has seen some issues around the globe, in europe for example, it's been trying to introduce some new menu items to keep customers interested.

What's the risk that it doesn't work?

Well, there's always that chance but i believe mcdonald's will have things figured out and looking at it here, the worst case scenario, $850 premium is gone.

As a trader, i recommend half what you pay because if the option loses half of the value, either you're running out of time or the market has gone the other way.

So essentially, risk of $425. gotcha.

And you're not that worried, i guess -- it's mcdonald's. people aren't going to forget about it tomorrow.

I love you using the tag line.

Thanks a lot.

Thank you so much for joining us alan.

This text has been automatically generated. It may not be 100% accurate.

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