McDonalds Stock In The Money Naked Puts Revisited

Sep 18, 2012 | McDonalds Stock (MCD)

McDonalds Stock has been a favorite of mine since 1993. I eventually owned 1000 shares at $13. The dividend when I owned shares was .025 cents. Today that dividend is .70 cents or an increase of 2700%. Now that’s dividend growth! I still have 1000 shares from back in the early 1990s. There have been 2 stocks splits since then and the capital gain is 666% but I have no intention of ever selling. I use my McDonalds Stock to sell covered calls against. This giant restaurant company continually strives to reinvent fast food and how to handle its customers. I cannot remember a time when I did not like McDonalds Stock. Through a combination of my covered calls, my dividend and lots of Put Selling, I have earned annual double-digit returns on McDonalds Stock. These are not annualized returns but actual every year double-digit returns. This is just another reason I stay with large cap dividend paying stocks.

McDonalds Stock In The Money Puts

Readers may remember an investor writing in wondering how to handle his in the money naked puts on McDonalds Stock back on May 11 2012. You can read that three-part article where I discuss various strategies that could be used to rescue his McDonalds Stock in the money naked puts through these links:

Naked Puts On McDonalds Stock (MCD Stock) Fall In The Money Part 1

Naked Puts On McDonalds Stock (MCD Stock) Fall In The Money Part 2

Naked Puts On McDonalds Stock (MCD Stock) Fall In The Money Part 3

Yesterday Robert asked the following regarding his McDonalds Stock In The Money Naked Puts

I’ve been shorting the MCD 95 and 97.5 puts since February, but I started to get into a little trouble in April when my puts got in the money. I rolled them into May for a credit, but by the middle of May MCD was trading at 91. Teddi gave me a few general ideas and strategies (available on her web site (see links above)), so I rolled 2 contracts into the September 95’s, and 1 contract all the way down to Sep 80. All of this for a nice credit and reduced risk. So, I’m still sitting on two short puts expiring this week at 95, but my year to date profit trading in MCD is still below its high achieved the beginning of May when MCD was above 97. I’m still bullish on MCD, so I’m thinking of rolling them into the October 95’s for a credit of 0.45. Doesn’t seem like a lot considering the time I’ve spent in the trade, but looking back, I’m up about 4.5% on MCD considering a maximum risk of around 28K. Any suggestions out there which may improve my position?

McDonalds Stock Ongoing In The Money Naked Puts Suggestions

To continue this trade I do have a few suggestions for Robert. Remember these are suggestions only and you always trade at your own risk.

McDonalds Stock In The Money Naked Puts Strategy Idea 1

The first suggestion for Robert would be a very simple trade of just keep rolling the $95 put strike, month after month. Eventually I believe the stock will be trading above $95 in value and these in the money naked puts will expire out of the money. With a present dividend of $2.80 the yield will be 2.9% at $95. McDonalds Stock should see a dividend increase for the next quarter and I will not be surprised to see a stock split shortly for McDonalds Stock.

Use this McDonalds Stock link to stay up to date on what is happening with McDonalds Stock.

While by rolling you are only earning about half a percent. This would keep 2 put contracts at $95. This ties up $19,000 in capital of your original $28,000.

For the remaining 9,000.00 of your capital move higher with McDonalds Stock Put Selling. If this was my capital I would be also using margin to sell two additional puts further out of the money.

For example my next McDonalds Trade would look something like this:

$28,000 capital available:

Buy to close 2 naked puts Sept $95 for $2.70

Sell to open 2 naked puts Oct $95 for $3.15

Sell to open 1 naked put December $87.50 for $1.25


Sell 2 naked puts December $82.50 for .44

Total Income Earned = $303

Your total margin in use is $82.50 X 200 = $16500. How much margin and what McDonalds Stock put strikes you think are best to sell all depends on your outlook for McDonalds Stock and how much risk of assignment you wish to take. I would also be doing the roll out on the $95.00 any day now as McDonalds Stock is overbought and could pullback between Tuesday and Friday, which is September options expiry. I would not rush but place a bid and ask at what you perceive as reasonable amounts and wait for a fill on your McDonalds Stock puts.

McDonald Stock chart for Sept 2012

McDonald Stock chart for Sept 2012

McDonalds Stock chart for September 2012 key points to follow:

A) McDonalds Stock pulled away from the Upper Bollinger Band after Sept 11 and has not regained it despite moving higher than the Sept 11 intra day high. McDonalds Stock is trending higher but is moving sideways unable to regain the Upper Bollinger Band. This is a sign that the stock could be going to pullback. The pullback could be quite soft but with options expiry on Friday even a .50 cent pullback will make the September $95 put more expensive which will reduce the earnings on rolling to October $95.

B) The last trend higher in McDonalds Stock was sloppy and without conviction of volume. McDonalds Stock has had a poor recovery over the past 4 trading sessions and that recovery today remains poor as well. It should have jumped back to the Upper Bollinger Band if there had been conviction behind the push higher.

C) McDonalds Stock is exhibiting higher highs and higher lows which is a good sign that the stock has strength and will probably try to move higher over the next little while.

McDonalds Stock Technical Analysis

Stock technical analysis of McDonalds Stock shows that it is heavily overbought and the Ultimate Oscillator is today turning down. With most stock technical analysis tools showing overbought, if you considered rolling today the $95 in the money put strike, I would be tempted to wait to see if McDonalds Stock moves lower over the next day or two before selling the additional naked puts.

McDonalds Stock Technical Analysis

Stock Technical Analysis of McDonalds Stock

McDonalds Stock In The Money Naked Puts Strategy Idea 2 (For The More Risk Averse)

The above strategy number 1 on McDonalds Stock in the money puts can be modified in any number of ways by Robert. The McDonalds Stock put strike selection can be based on whatever put strikes he deems interested in Put Selling dependent on whether you are willing to own shares at the strikes you choose to sell. My strategy 1 above is just an example to get you thinking about Put Selling possibilities.

McDonalds Stock In The Money Idea 2 is for the risk averse investor. If Robert feels that McDonalds Stock may fall and bit further and is concerned at all, he may want to roll his Sept $95 in the money naked puts from September all the way out to December and roll down to $92.50 which can be done with a net credit. If even more risk averse, Robert could consider rolling his naked puts out to January at $92.50 which brings in even more income, or roll even further and go to March 2013 and down to the McDonalds Stock $90 put strike which again would be for a net credit.

Any of the above rolls would place Robert lower in McDonalds Stock if assigned, and continue to generate a credit, but remember that the further out in time you select to roll down means your capital is locked into a position that is earning less income over that period of time. In other words, if Robert rolled down to $90 all the way out to March 2013, his capital is locked into that trade until such time as he decides to get out of the trade. That is many months when his capital is not continuing to generate more income.

The way around locking up his capital for such a long period of time and still produce additional income is to remember that by rolling from $95 to $90 he has released an additional $1000 of capital. ($500 X 2 naked puts = $1000). This brings his available capital for his McDonalds Stock Put Selling to $10,000 which is not invested in naked puts. He could then consider moving higher and selling the same strike as his March position. In other words, sell the $90 naked put each month. The $90 October McDonalds Stock naked put is earning .65 cents presently. He could then use margin to sell two additional out of the money naked puts on McDonalds Stock as per the above (idea 1) example.

So his trade might now look like this:

$28,000 capital available:

Buy to close 2 naked puts Sept $95 for $2.70

Sell to open 2 naked puts March 2013 $90 for $3.50

Sell to open 1 naked put Oct $90 for .65


Sell 2 naked puts December $82.50 for .44

Total Income Earned = $313

The amount earned is about the same but the 2 McDonalds Stock put strikes for the $95 are effectively gone and Robert is still earning additional capital. As well Robert can keep selling naked puts monthly with his single naked put and come December he will also be able to sell additional naked puts with margin. Then when March arrives, he should end up with 3 naked puts at the $90 put strike. Even if McDonalds Stock is trading below $90, he can then repeat the entire cycle as before. In other words, buy back his in the money $90 put strikes, and roll further out and reduce by 1 the number of naked puts being sold. Then with the freed up capital sell additional naked puts. Done properly, this put selling strategy can be repeated indefinitely as the investor works his way lower and lower in a stock over a period of time and continues to generate income. The income generated will never be as large as that made if all the naked puts kept expiring, but nonetheless, there is income being generated and the risk of assignment is being reduced throughout the trade.

For example come March 2013 if McDonalds Stock is trading at $87.50 Robert’s trade might look like this:

Now holding 3 naked puts for March 2013 at $90, caused by selling the October $90 naked put and rolling it monthly until it reached March 2013. If the $90 strike was rolled each month and only .45 cents earned Robert will have earned .45 X 6 months = $2.70.

If Robert was above to use margin and the December $82.50 strikes expired, he may have sold the $82.50 put strikes again for an additional $88.00. Therefore by March 2013 Robert may have earned a total of $671.00. Theoretically in March 2013 Robert could do this:

Buy to close 3 naked puts March $90 for $2.65

Sell to open 2 naked puts July $90 for $3.30

Sell to open 1 naked put July $85.00 for $1.95

Sell with margin 2 naked puts May $82.50 for .65

Total income = $190.00

McDonalds Stock In The Money Naked Puts Summation

The above is just theory and no one can determine what the future holds for McDonalds Stock or the stock market in general. There are plenty of other strategies that can be used including selling naked puts, turning to credit spreads or even iron condors to help augment the income being earned. All of these add additional possibilities and additional complexities.

What is important to take away from the above two examples on McDonalds Stock in the money naked puts is to understand that there are strategies available which an investor can use which will continue to generate income while reducing the sold put positions that are in the money which reduces the risk of assignment at valuations which the investor feels are too high.


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