How to Play the Meatless Burger War
A year ago, I recommended selling a put option on McDonald’s (NYSE: MCD) when it was trading around $160. I suggested selling a put option with a strike price of $150 that expired in three months in exchange for a premium of $2.
As I said then, “I would gladly buy MCD at a (net) share price of $148” if the option was exercised against us. I went on to note, “MCD’s reduced share price combined with its improved long-term profit outlook makes McDonald’s a tastier investment than it was at the start of the year.”
Turns out, I should have added some special sauce to that prediction. On May 31, MCD traded above $200 for the first time. That works out a 25% gain in one year, nearly four times the return of the S&P 500 Index.
So now that it’s at an all-time high, I believe McDonald’s can once again be flipped for a fat profit regardless of which direction it turns next.
Here’s how you do it.
In this case, I am suggesting using a different options technique known as a “long straddle,” which entails buying both a call and a put on the same stock. Also, both options have the same strike price and same expiration date.
The idea is that you believe the stock is likely to make a big move, but you aren’t sure which way it is going to go. In the case of MCD, I can make an equally strong argument that it could move as much as 25% (or more) in either direction by the end of next year.
The recent initial public offering (IPO) of vegan food producer Beyond Meat (NSDQ: BYND) has excited the stock market beyond belief, as I discussed in a recent article. As I pointed out, less than a month later Burger King introduced its version of a meatless burger in the United States that caused BYND to drop 22% that day.
McDonald’s has been testing its take on a vegan burger in Germany for the past two months. Presumably, once the company believes it has hit upon a winning formula, American consumers will get a taste of it.
Given the excitement surrounding Beyond Meat, I suspect that McDonald’s management team will feel pressured to introduce its meatless burger sooner rather than later. Depending on how that goes, I believe its stock will either soar to $250 or plunge to $150.
The stakes, pardon the pun, are that high.
McDonald’s is being coy about when, and if, it will introduce a meatless burger in the U.S. So, I suggest going out to the January 15, 2021 options expiration date for this trade. That allows plenty of time for the meatless burger war to reach full broil.
As of last week, that $200 call option on MCD could be bought for $21. At the same time, the $200 put option could be bought for $17. That’s a total cost of $38 to play both sides of this trade.
That means for this trade to be profitable, at some point over the next 18 months MCD must trade above $238 or below $162.
If MCD rises to $250 or drops to $150 before expiration, the net gain on the intrinsic value of this trade would be 31% ($12 net profit divided into the $38 cost). To the extent MCD trades higher or lower than that, your potential profit is commensurately bigger.
Conversely, if MCD closes at exactly $200 on expiration, both option premiums paid would be entirely lost. Needless to say, this type of trade is not for the faint of heart. If you aren’t comfortable trading options, then don’t do it.
However, if you’re looking for a way to participate in the meatless burger war but have no idea who the ultimate winner(s) will be, this trade is less speculative than buying shares of Beyond Meat and hoping that you don’t get burned.
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