Believe it or not, successful traders do not have a crystal ball. All that he or she does successfully is find a potentially favorable set up and then put the odds in such a way where the reward makes sense to the risk. Repeat this process many, many times and you have a system that works out in the long run. I cannot tell which trade signals are the “good” ones. I just have to let the numbers pan out. So, let’s take a look at our play in McDonald’s (MCD). I note two main things: MCD has huge exposure in China and there is a very significant resistance level just above here. First, let’s look at the Chinese exposure. The correction in the Chinese stock market is well-documented. It is our assertion that we are not quite out of the woods. First we look for companies who have significant exposure to China and then which charts show some weakness. MCD has significant exposure in China and from the chart below you can see how it has a triple top and subsequent rejection at the ~$101 area:
We have identified a stock that has shown some very strong resistance and significant Chinese exposure that is ripe for a pullback or at the very least, is not going much higher. The signal was:
8-3-15: Based on our methodology a signal has been generated:
Sell (opening) the MCD August 100 call
Buy (opening) the MCD August 101 call
For a CREDIT of $0.40 or more.
We are laying only 1.5:1 here and we have to hold through August 21st. As long as, at expiration, we are at or below $100 we collect our entire premium. Our max risk is if we go to $101 or higher, we still get our $0.40 of premium but the spread is worth the full $1.00 and we net lose $0.60. Thus our reward to risk ratio is .40/.60 = 2/3 = laying 1.5:1 odds.
