McDonald’s, a once-stable investment choice, has faced significant challenges in 2024, prompting some investors to consider bearish trades in MCD stock. Amidst soaring fast food prices, exemplified by the doubling of a McDonald’s quarter pounder with cheese over the past decade, the company has struggled to maintain its market standing. With shares plummeting by as much as 11.4% year-to-date and holding a lackluster 22 Relative Strength Rating, McDonald’s has emerged as a potential short sale candidate, even finding its way onto the IBD Leaderboard.
Despite a broader market surge, evidenced by the S&P 500’s 10.4% increase, MCD stock has bucked the trend, declining over 7% during the same period. First-quarter earnings fell short of analyst estimates by 2 cents, with sales meeting expectations at $6.17 billion. Moreover, geopolitical tensions in the Middle East have exacerbated challenges for McDonald’s, with consumer boycotts stemming from perceived support for Israel further dampening investor sentiment.
In light of these headwinds, investors eyeing further downside in McDonald’s stock may consider purchasing put options to profit from potential declines while mitigating risk. For instance, a put option with a July 19 expiry and a strike price of 275 could offer an effective means of expressing bearish sentiment. With the option costing $6.80 per contract, investors face a maximum loss of $680 if MCD stock trades above 275 upon expiry. However, if McDonald’s shares experience substantial declines, gains from the put option are unlimited, offering the potential for significant returns.
The relatively low implied volatility of the July 19 option, currently at 13.5%, suggests that the option may be relatively inexpensive. This is particularly noteworthy given McDonald’s historical volatility levels of 20% and 16% over 30 and 200-day periods, respectively. Additionally, the technical chart indicates that McDonald’s is trading in a flat base below its 50-day moving average and the 200-day line, suggesting potential resistance at these levels.
One of the key advantages of purchasing a put option over shorting shares is the limited downside risk, with the most one can lose being the premium paid for the option. This risk management feature makes put options an attractive choice for investors looking to capitalize on potential declines in McDonald’s stock without exposing themselves to unlimited losses associated with short selling.
In conclusion, amidst a challenging operating environment and geopolitical uncertainties, a bearish outlook on McDonald’s stock may present opportunities for investors to profit from potential downside movements while effectively managing risk through the purchase of put options.