McDonald's Corp Stock May Have Hit Bottom - Ways to Play MCD Stock

McDonald's Corp. (MCD) stock has tumbled based on fears about how gas prices have affected sales. But it may have been overdone, especially now that gas prices are falling. This article looks at ways to play MCD stock using out-of-the-money puts and in-the-money calls.

MCD closed at $269.76 on Friday, June 26, up from a recent trough of $264.54 on June 25. Moreover, it's well below a 3-month peak of $311.36 on April 17. 

However, based on our analysis of its strong free cash flow (FCF), MCD stock could still be worth almost $300 per share, 11% higher. 

Price Targets for MCD Stock

I discussed this in a May 10 Barchart article, “McDonald's Stock Falls Through 1-Year Lows - Are Sales Slowdown Fears Overdone?” I showed that MCD could be worth $299.16 per share, based on analysts' revenue forecasts and using a 26% FCF margin forecast (i.e., its trailing 12-month FCF margin).

For example, analysts project revenue between $28.5 billion this year and $30.17 billion next year, or $29.335 billion over the next 12 months (NTM).

That implies, using its average 26% FCF margin (over the last 12 months), McDonald's Corp. could generate $7.63 billion in free cash flow (FCF).

And, using a 3.6% FCF yield, as shown in my article, the fair market value (FMV) is $212 billion:

  $7.63b FCF / 0.0359 = $212.5 billion FMV

That is 10.6% higher than Friday's market cap calculation of $191.7 billion, according to Yahoo! Finance. In other words, the price target (PT) is almost $300:

  $212.5b / $191.7b = 1.109

  $269.76 price x 1.109 = $299.16 PT

Other analysts agree. They even have higher PTs. For example, Yahoo! Finance's average analyst survey PT is $330.94, Barchart's is $330.59, and AnaChart's is $351.90.

However, there is no guarantee that MCD will rise to these higher price targets. 

So, there are ways to play it, as I discussed in last month's Barchart article on MCD. For one, an investor can sell short one-month out-of-the-money puts. That way, they can set a lower potential buy-in and also collect income while waiting.

In addition, some investors can use this income (each month) to help defray the purchase of a 6-month in-the-money (ITM) MCD call option.

Shorting 1-Month ITM MCD Calls

For example, the $260.00 put option strike price expiring July 31 has a midpoint premium of $3.08 per put contract. That strike price is 3.6% lower than Friday's close for the next 34 days.

That implies a short-seller earns an immediate income of $1.185% (i.e., $3.08/$260.00) over the next month.

This means that an investor first posts $26,000 with their brokerage firm. Then they enter a trading order to “Sell to Open” one put at $260.00. The $26K secures collateral in case MCD falls to $260.00, and the account is assigned to buy 100 shares put put shorted at $260.00.

However, the account immediately receives $308.00. The account gets to keep this income. That means that, even if MCD falls to $260.00, the net breakeven buy-in is:

  $260.00 - $3.08 = $256.92 breakeven

That is 4.76% below Friday's close. Moreover, if an investor can repeat this play for the next five months, the potential income is over $18:

  $3.08 x 6 = $18.48

That could help pay the premium for a 6-month MCD in-the-money (ITM) call option at the same strike price.

Buying ITM MCD Calls

For example, the Dec. 18, 2026, expiry $260.00 call option has a midpoint premium of $23.98. That implies that the net cost of an investor who shorts puts to help pay for this call is just $5.50:  $23.98 - $18.48

In other words, the net buy-in point is just $265.50, which is below today's price of $269.76.

That way, an investor can potentially make an in-the-money MCD call purchase today with some potential intrinsic value. However, keep in mind that this assumes that the investor is able to continually short out-of-the-money (OTM) puts each month for the next 6-months at high premiums. 

That implies, as well, that the potential upside is very high, using our price target of $299.16:

  $299.16 - $260.00 = $39.16 intrinsic value

  $39.16 / $5.50 -1 net call option cost = 7.12x -1 = 612% profit

The investor could make a 612% profit using OTM puts and ITM calls to make a leveraged investment in MCD stock.

The bottom line is that MCD stock still looks undervalued. Using OTM puts and ITM calls are two ways to play the stock.