UBS bullish on McDonald's options

Investors should buy bullish McDonald's Corp. options because the world's largest restaurant chain may beat analyst estimates on rising sales when it reports third-quarter results tomorrow, UBS AG said.

Equity derivatives strategist Mitchell Revsine recommended buying a December $80 call while selling a December $70 put, a strategy known as a risk reversal that is a proxy for owning the stock. The shares climbed 0.6 percent to $77.41 as of 4 p.m. in New York to extend this year's gain to 24 percent, or more than four times the rise for the Standard & Poor's 500 Index.

McDonald's may exceed earnings estimates tomorrow on “strong domestic sales and benign food costs,” industry analyst David Palmer wrote in the report. The Oak Brook, Illinois-based company may report profit of $1.25 a share, the average of 20 estimates in a Bloomberg survey. Palmer rates the stock at “buy” and has an $83 share-price forecast.

“The company is well positioned to kick off another round of earnings revisions by the Street following its 3Q result, which should help drive the stock higher,” Palmer wrote. “We expect sales momentum to continue in 4Q, partly due to well conceived marketing coming in October, November, and December.”

Calls give the right to buy a security for a certain amount, the strike price, by a set date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will rise or fall.