I’m not going to keep you all in suspense. If you want the quick story, I believe McDonald’s (NYSE: MCD) represents an enticing upside opportunity ahead of the fast-food giant’s fiscal second-quarter earnings report (on Aug. 4 before the market open). My argument for MCD stock comes down to statistics. Because the ticker has suffered an extended downturn, this behavioral state enhances the probability of positive mean reversion.
Unlike your typical finpub article, though, I have a very specific case to make. Based on historical data — which I will share — risk-tolerant options traders may consider the 267.50/272.50 bull call spread expiring Aug. 21. The reason? Wall Street defines the probability of MCD stock rising through the second-leg strike ($272.50) at between 33.6% and 34%. This figure comes from the Black-Scholes model, which is used as a standardized pricing mechanism.
However, Black-Scholes is a “closed”- circuit, deterministic model, meaning that it can’t produce outcomes that extend beyond the parameters of its formula. On the other hand, I’m running a non-parametric model that observes past market behavior, allowing the data to speak for itself.
And what is the data saying? At the Aug. 21 expiration date or near it, the probability that MCD stock will rise through the $272.50 strike is 52% (based on my model). Basically, there’s a solid chance that the above bull spread is underpriced by 1,800 points of risk coverage. In other words, the aforementioned options spread may be less risky than is advertised — that’s why each spread carries a net debit of only $250.
Compare that to the 245/272.50 bull call spread, also expiring Aug. 21. Wall Street assigns a probability of profit here of 51.1% but the net debit required for this trade is $1,800. Since you pay a pretty penny for higher odds, using a non-parametric model to discover potential mispriced options can give you a serious advantage.
Why is Everyone Optimistic About MCD Stock?
It might just be me but it does seem that the finpub ecosystem is bullish on McDonald’s stock. My good friend Will Ashworth of Barchart gave a comprehensive analysis of why investors are suddenly tuned into the Golden Arches. Basically, Ashworth provides five points:
- A historical pattern shows that MCD stock has only dipped below its 30-day moving average three times (2020, 2024 and 2026). Therefore, the assumption is that McDonald’s is due for a rebound.
- MCD’s forward price-earnings ratio has compressed to 20.44x, the lowest level in over eight years, thus making the risk/reward picture more palatable.
- Ashworth highlights that MCD generated $10.6 billion in operating cash flow, easily covering its $10.5 billion in combined capex ($3.37B), dividend payouts ($5.12B) and share buybacks ($2.02B) without needing outside capital.
- The five-year annualized return (4.65%) for MCD stock is less than half its 10-year return (9.61%), signaling potential mean reversion upward over the coming years.
- Ashworth frames Q2 same-store sales as the potential sentiment floor (“low-water mark”) before upcoming menu innovations, beverage rollouts and an investor event turn momentum around later in the year.
What’s interesting, though, is Ashworth’s final few sentences: “Does that mean you shouldn’t buy MCD stock at $264? Nope. Historically, McDonald’s FCF yield has been lower than many of its peers. It shouldn’t be a dealbreaker. However, I would definitely wait until after it reports earnings on Aug. 4.”
From an options trading perspective, I respectfully disagree. If McDonald’s happens to release positive results — and that’s the argument here, right? — MCD stock risks shooting higher. Indeed, that’s what the smart money is counting on.
Want evidence? Sure — just look at the volatility skew for the July 31 expiration date. It’s clear as daylight that the skew is leaning heavily toward out-the-money (OTM) calls than OTM puts. As such, you have heightened implied volatility (IV) spikes for call options relative to puts.
No, this doesn’t mean that McDonald’s stock is guaranteed to jump higher post-earnings. But it does demonstrate that the smart money doesn’t want to risk losing out on an upswing more so than covering their downside risk potential.
In that kind of environment, you’ll pay a pretty penny if the Golden Arches does release encouraging results. So no, if you’re bullish on MCD stock, I wouldn’t wait until after earnings; I would get in right now.
Making the Statistical Argument for McDonald’s Stock
Why then should traders consider betting on McDonald’s stock? Simply, because MCD is a reliable blue chip, it doesn’t usually suffer extended downturns. But when it does, the subsequent period on average generates higher-than-normal performance.
In the last 10 weeks, we know that MCD stock has only managed to print four up weeks, thus leading to a downward slope. What most people don’t know is that this particular 4-6-D quantitative sequence has materialized 50 times on a rolling basis since January 2019. Further, 10 weeks following this signal, the expected median distribution lands between $258 and $286 (assuming a starting price of $263.57).
If we were trading McDonald’s stock randomly — meaning without paying attention to specific signals — the expected 10-week forward distribution would be between $262 and $272. That’s quite a difference, especially on the bullish (right) side of the tail.
What’s also notable is the p-value of this signal, which is 0.0001. In practice, this miniscule figure suggests that there’s an extremely small chance that the positive distortion that we just discussed could come about by chance.
Now, this doesn’t mean that MCD stock is guaranteed to rise as forecasted. It’s just that we have greater confidence we’re not just trading random noise or mere coincidences.
Why the 267.50/272.50 Bull Spread?
With all this information out of the way, you might be wondering, why did I highlight the 267.50/272.50 bull call spread expiring Aug. 21? Per the data that I collected, the median outcome at the end of week 5 following the flashing of the 4-6-D signal is around $273. Therefore, the $272.50 strike seems quite realistic.
Statistically, of the 50 times that the above signal has flashed, MCD stock has hit or exceeded the equivalent of the $272.50 level on week 5 a total of 26 times. Therefore, the probability of full probability could be 52%.
Compare that to the market’s probability of profit 38.2% — for reaching only the breakeven price of $270 at expiration. You can see the deal clearly. You’re getting 52% of probability but only paying for 38%. That’s why I’m bullish on McDonald’s stock, not because of earnings or cash flow or some vibe check. No, there’s a chance that MCD is statistically priced lower than it should be.
