McDonald's stock is currently the second most oversold of all the Dow Jones Industrial Average stocks.
Dow stocks are great for trading options because there is a lot of liquidity, which means it's easier to get filled for a good price.
Blue chip stocks like McDonald's generally don't stay oversold for too long. Intel and Cisco stock were the most oversold stocks in the Dow in late October and have since rallied impressively.
For investors with a neutral to bullish bias on McDonald's stock, a nice and easy option trade is a bull put spread.
A bull put spread is a defined-risk option strategy that profits if the stock closes above the short strike at expiration.
To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put.
McDonald's stock is showing support at a price of 205, and the 200-day moving average sits around 198.
Bullish MCD Stock Option Trade
Traders who think McDonald's stock will not drop below the 200-day moving average could look to sell a Jan. 15-expiring put with a 195 strike price and buy a Jan. 15 190 put.
As of Tuesday, this spread was trading for around 60 cents, which means a trader selling this spread would receive $60 in option premium and would have a maximum risk of $440.
That represents a potential 13.64% return on risk in 37 days, as long as McDonald's stock remains above 195.
If the stock closes below 190 on the expiration date, the trade loses the full $440.
In terms of risk management, I would close the trade if McDonald's stock broke through a price of 197.
The company does not report earnings until Feb. 9, so there is no earnings risk with this trade.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
