Trade Like A Hedge Fund with this Pairs Trade


Right now McDonalds (MCD) is extremely undervalued compared to its peer Burger King (BKW). Here are the statistics:

McDonalds: 6 Month Return 0.26% ROE 36% ROI 21% P/E 15 Dividend Yield 3.40%

Burger King: 6 Month Return 34.25% ROE 18% ROI 10% P/E 24 Dividend Yield 1.06%

Basically McDonalds is cheaper, has a higher dividend yield and double the profitability of Burger King yet Burger King has outperformed MCD by almost 35% over the last 6 months.

So how do you trade this, you simply go long and equal amount of MCD and short and equal amount of BKW. You can do this with stocks but a better play is to use options.

I would buy the May $97 MCD Calls for $1.10 a piece while simultaneously buying 2 May $25 BKW puts for $.55 cents.

Basically you would buy 10 May $97 MCD Calls for a total cost of $1100 and at the same time buy 20 May $25 Puts for $1100 dollars.

The catalyst that will reprice this trade will be earnings: McDonalds and Burger King both report earnings in late April.

It’s called a market neutral trade because you have zero market risk.

Will Meade
President of The Billionaires Portfolio