McDonald’s Stock Trade Could Return $515 If It Stays In This Profit Zone | IBD | Summary and Q&A

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February 6, 2023
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Investor's Business Daily
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McDonald’s Stock Trade Could Return $515 If It Stays In This Profit Zone | IBD

TL;DR

An analysis of using a broken wing butterfly option strategy to potentially profit from McDonald's stock moving sideways and slightly lower.

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Questions & Answers

Q: What is a broken wing butterfly option strategy?

A broken wing butterfly option strategy involves selling two put options at a target strike price, buying one lower strike put, and one higher strike put relative to the two short puts. It aims to benefit from a stock moving sideways or slightly lower.

Q: How does the broken wing butterfly strategy generate profit?

The trade will make a profit if the stock price stays within the credit spread strikes. The biggest profit is earned if the stock moves slightly lower towards the short put strikes.

Q: What is the risk involved in the broken wing butterfly strategy?

The trade has zero risk on the upside. However, if the stock moves below the credit spread strikes, there can be a loss. The risk is defined, so the worst-case scenario is known before entering the trade.

Q: What is the trade management approach for this strategy?

It is advisable to set a stop loss of twenty percent of the total capital at risk. This helps to limit potential losses if the trade doesn't go as planned.

Summary & Key Takeaways

  • McDonald's stock has been drifting sideways and recently crossed below support at its 50-day and 21-day lines, potentially indicating a bearish trend.

  • The broken wing butterfly option strategy aims to profit from McDonald's stock staying within a specific price range on expiration.

  • This strategy involves selling two put options at a given target strike price, buying one lower strike put, and one higher strike put relative to the two short puts.

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