December 14, 2018

Let’s Talk Strategy, CME and McDonald’s

Stocks across the globe are losing ground after weak economic data from China and Europe (see below) fanned concerns of a worldwide slowdown. Traders had anticipated a “Santa Rally” might have arrived following a rough December start for equities, but current sentiment may now signal a dead-cat bounce. On the U.S. economic calendar for today are retail sales, industrial production and the flash Composite Purchasing Managers’ Index.
*Source: Seeking Alpha

Let’s consider McDonald’s Corporation (Ticker: MCD):

The VantagePoint platform recently indicated upside momentum.

Using the predictive indicators embedded within the VantagePoint platform and its predictive AI technology, we will point out three significant things. We have a bullish crossover indicated by the blue predictive indicator line crossing above the black simple moving average on ecember 13th. We can combine that with the VantagePoint propriety neural index indicator moving from the RED to the stacked GREEN position on the same day. This indicator measures strength and weakness for a 48-hour period, in this case, very pronounced strength. The move to the stacked GREEN position further makes the case for a potentially bullish scenario. We also have the predicted high and low above yesterday’s actual high and low indicating further strength. I want to play the VP bullish indication.

Strategy Discussion

If you are strictly a stock trader, simply buying MCD in the $186.50 area is a prudent move. You are anticipating a move to the upside. It is always a good idea to enter a sell-stop order to mitigate potential losses. Placing that sell-stop in the $184.00 area will achieve that goal.

For active traders with a shorter investment time horizon, you can consider a setup utilizing options. Given the market conditions outlined above, taking an active, premium debit approach may be the best path to success.

Because of the reasons given above, the purchase of a debit call spread may be one way to approach this situation. You will first want to calculate your target strike. In order to do this, you will need three pieces of data: current price, expiration date and the implied volatility associated with that expiration date. For MCD, that yields a targeted strike of ~$192.50. You may want to consider the MCD December 28th regular monthly expiration 190/192.50 call spread, buying it for $0.60. The most you can lose is the premium paid and the most you can gain is the width of the spread less any premium paid. Max risk = $0.60 and max reward = $1.90. This means that you are getting odds of slightly better than 3:1.

Given the trading and market environment outlined above, a trader must evaluate whether this reward/risk ratio is appropriate for his/her risk tolerance.

Position Update
You will recall that earlier in the week, we identified a bullish opportunity in CME Group (Ticker: CME). We a long a call vertical. Here’s what the chart looks like today:

As you can see, there are some signs of weakness emerging in CME. We are closely monitoring this position, but have made the decision to hold the position and see what events, if any unfold over the weekend. We may decide to exit this spread early next week.

If you would like to learn more about the VantagePoint platform and take advantage of the exclusive offer that our clients enjoy, please visit:

https://discover.vantagepointsoftware.com/prosper-demo/

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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