MCD Stock (McDonalds Stock) has returned to my portfolio on Sept 23. I received a lot of emails when I posted my Sept 23 trade in MCD Stock but didn’t do a write up about why I went back to writing puts on MCD stock after 4 months. I finally got around to writing my analysis of McDonalds stock to explain my decision to sell puts again.
Regular readers know that I look at stocks as under-valued and over-valued and when stocks become over-valued and put premiums are small, I close my position and move on.
The analysis below on MCD Stock is the type of analysis I do for most of my stocks throughout the year but in particular when they move into over-valuation to decide what put strikes to write next and what might be expected of the stock. It is important to remember when writing puts for income that stock selection is as critical as what strikes to select to sell. Writing puts for income is a strategy of small monthly gains. Without taking time to analyzed a stock’s chart an investor could easily sell puts at a strike that originally seemed like a perfect trade only to watch the stock plummet leaving the investor with a deep in the money sold put. One or two bad trades can wipe out months of gains. I recommend every investor take time to study the chart patterns of a stock before deciding on what put to sell.
MCD Stock (McDonalds Stock) Analysis – Sep 23 2011
MCD Stock (McDonalds Stock) entered over-valued territory on May 23 2011 and I stopped writing put options against MCD Stock.
On May 23 2011 I wrote “MCD Stock (McDonalds Stock) continues to climb. I cannot sell naked puts at this level as I believe it is over valued. The Ultimate Oscillator has been oversold for a few sessions. There is never any guarantee of a pullback, but I would think one has to come soon for McDonalds. Until then, this trade is on hold.”
Since May 23 MCD Stock has not had any kind of correction.
MCD Stock (McDonalds Stock) – What The Charts Say Now
Looking at the McDonalds Stock chart below you can see the overbought indicator when I announced I would no longer be writing puts on MCD Stock. There was a short pullback of a few days, which if I was a day trader would have probably made some nice profits going down and backup in MCD Stock. However I have never been any good at day trading stocks so suffice to say the chart looked promising into early June for a pullback to below $80.00.
But this did not happen. Instead the McDonalds Stock chart shows strength was at $80.00 and then MCD Stock moved higher. By July McDonalds Stock was flirting with the $90.00 range, failed to bream and pulled right back. MCD Stock tested support and failed to break the 100 day moving average in the August big selloff.
This brought the stock back to my radar but I wanted to see another re-test to see if MCD Stock could break the 100 day moving average. In late August selling intensified and the stock fell. You can see the big gap down on Sep 9 2011 and once more McDonalds stock refused to break the 100 day moving average. There are now so many investors into MCD Stock, in particular institutional money, that I looked at the Ultimate Oscillator. MACD Indicator and Relative Strength Index (RSI) for McDonalds Stock to see what these technical indicators had to say.
The Ultimate Oscillator has only marginally reached overbought a couple of times since my May 23 2011 call on MCD Stock.
Important was the RSI Indicator (Relative Strength Index) for McDonalds Stock. It remained fully positive on the big sell-off days including the August 8 plunge in the markets.
Of interest was the MACD Indicator (moving average convergence divergence) when looking at the two big sell-off days, in August and September. The August 8 sell-off produced just a mile negative 0.43 and then MCD Stock quickly recovered as did the MACD Indicator.
The Sept sell-off again produced just a mild negative 0.55 before recovering.
For my trade, the most important of the indicators was that MCD Stock failed to break the 100 day moving average. This combined with the other indicators discussed above tells me that there is still some time left for writing puts against MCD Stock before any serious correction occurs.
MCD Stock (McDonalds Stock) – Back To Writing Puts
Finally by looking at the chart and the technicals I can see that the $82.50 level has reasonable support as it rests. As well MCD Stock at $82.50 is below the 100 day moving average which McDonalds Stock has retested at least twice but perhaps three times in the last two months.
Finally the 200 day moving average is just below the $82.50 strike which means that should MCD Stock decisively break the 100 day moving average which could signal a change in trend, I will have the chance to buy back my $82.50 puts on McDonalds Stock and roll them lower. As long as I do not wait too long should the 100 day moving average break, then I will have time to roll down for a net credit on any roll.
Presently though, the strength in MCD Stock tells me that it is time to get back into writing puts, albeit far out of the money and when possible, at the 200 day moving average. With the volatility high in the present market as investors fear Europe’s debt issues, the US slowdown in the economy, high unemployment and a myriad or other worries, put premiums in MCD Stock are excellent and make writing puts highly profitable even when doing so far out of the money.
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Select this link to view the MCD Stock (McDonalds Stock) 2009 trades.