MCD: A Low Risk Trade To Profit Over Time | IBD | Summary and Q&A

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March 14, 2023
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Investor's Business Daily
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MCD: A Low Risk Trade To Profit Over Time | IBD

TL;DR

A call calendar spread strategy is being used for McDonald's stock (MCD) to profit from the passage of time and potential increase in implied volatility.

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Questions & Answers

Q: What is a call calendar spread?

A call calendar spread is an options strategy where a short-term option is sold and a longer-term option with the same strike price is bought. It profits from the time decay and potential increase in implied volatility.

Q: Why is a call calendar spread considered a low-risk strategy?

A call calendar spread is considered low-risk because the maximum loss is limited to the net cost of the spread. It also benefits from time decay and can generate profits if the underlying stock remains around the strike price.

Q: How is the profit calculated for this trade?

The estimated maximum profit for the trade is $300, but it can vary depending on changes in implied volatility. If the underlying stock remains around the strike price, the sold option will decay faster, allowing the trade to be closed for a profit.

Q: What are the break-even prices for this trade?

The estimated break-even prices for this trade are around $256 and $277. These prices can slightly change depending on the impact of changes in implied volatility.

Summary & Key Takeaways

  • McDonald's stock (MCD) is trading sideways and forming a consolidation with a potential entry point at 281.77.

  • A call calendar spread strategy is being employed, involving selling a short-term option and buying a longer-term option with the same strike price.

  • The estimated maximum profit for the trade is $300, with a net cost of $150 per spread.

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