Several activist investors have been snapping up McDonald's shares over the past few months, and one trader sees a way to enjoy huge gains should those investors manage to actually boost the company's stock price.
Though share prices are flat this year, some large players have been grabbing McDonald's faster than the Hamburglar. Highfields Capital Management, Glenview Capital Management, Corvex Management, and Jana Partners are some of the marquee fund managers that have been buying hundreds of millions of dollars worth of MCD in the past quarter based on recent government filings. (Tweet This)
According to Andrew Keene of KeeneOnTheMarket.com, McDonald's recent price action looks similar to how it performed several months ago. And if history repeats itself, the stock could move higher.
"McDonald's is due for a breakout to the upside," Keene said for a segment on Tuesday on CNBC's "Trading Nation."
He noted that from October to March, shares ranged from $88 to $96 but is now ranging between $96 and $100. With the 50-day moving average in March breaking above the 200-day moving average, and with activists stepping up their holdings, Keene is optimistic that McDonald's stock could break to the upside.
"It has to break through $100 and then it has a measured move target up to $105," he said. McDonald's shares closed at $98.02 on Monday.
To play that sort of move, Keene has taken a long position in a 100/105/110 call butterfly for December expiration. This strategy involves buying one contract each of the 100-strike and 110-strike calls. To pay for it, Keene is selling two contracts of the 105-strike calls. A call gives its purchaser the right to buy a stock at set price within a given period.
The total cost is $55 each time this strategy is executed but Keene stands to gain multiples of that should McDonald's price move just 7 percent higher from Monday's close by the middle of December.
"My potential reward if McDonald's expires at $105 could be potentially $455," Keene said. Thus even a relatively small move in the stock could give Keene a maximum return of 727 percent on the money he wagered.
"I also have two breakeven points between $100.55 and $109.45," he added. "That's a great, great range."
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