I recently profiled a McDonald’s (MCD, $59.32, up $2.07) trade on October 7 and I wanted to give a quick update. The stock had a really good Monday along with the rest of the market and is enjoying a nice open this morning.
The November 65 calls (MCDKM, $1.45, up $0.40) were trading for 90 cents which would have allowed you to buy 10 contracts for about a $100 a contract. The total cost of this trade would have been under $1,000 and with the open, most of you are looking at 50% gains. We rubbed the genie bottle on this trade because we went long a few days before the market made a bottom. I didn’t discuss placing stops on this position because of the volatility but I probably should have. Usually I carry a 50% stop with most of my trades which allows me to get out of a position if a trade is going against me.
If you can limit losses to 50% and make gains of 50%-100%, then you will usually do well when trading an option portfolio. With this trade, that is where we are. The calls went on a roller coaster ride which was expected because of the volatility. That will continue if you stay in this trade.
The March 55 calls (MCDCK, $8.00, up $0.90) were going for $6.80 at the time and are also showing a slight profit. I still like these calls longer term and would continue to hold them. You could use the gains from the November calls to stay long the March calls.
They are numerous ways to build an option trading account into a powerhouse and it’s all about managing it. Just like when you play Scrabble, you need tile management. In Fantasy Football, you need player management. In options trading, you play the percentages. Take a look at your entry points, exit points, what the market is doing, how it is reacting, what trades you can make and especially take advantage of those who are fretting the market. You do that and you’ll find out you really are an option player.
Stay locked and loaded but keep your guard up. The market has been choppy today and we haven’t had back-to-back winning sessions in three weeks.