Sonic (SONC, $16.70, up $0.13) continues to trade higher on no real news. The restaurant sector has done well over the past few weeks and Sonic has participated in the rally. Lower oil prices have helped fuel a recovery from some of the lows as many of these stocks got hammered after Wall Street released pessimistic views for the quarter.

Most restaurant companies have reported their financial results so we will see what happens from here. We will still get monthly updates on the sector when same-store sales are reported and let’s hope the trend continues. However, let’s protect our profits just in case they slip from here.

Sonic was a great buy at $14 on 6/30 and we got an early Christmas present with the December 17.50 calls (ZSQLW, $1.35, up $0.45) which were trading for 70 cents. They are now up nearly 100% from our entry price. The calls don’t expire until December 19 but go ahead and sell half of the position today and set a stop of $1.00 on the other half.

Rick Rouse
Rick@OptionsMentoring.com

Sometimes a company just gets it. Despite the challenges companies have to raise shareholder value, McDonald’s (MCD, $64.23, up $2.37) is bending over backwards and doing cartwheels as we head into the Olympics. The timing couldn’t be any better.

The Beijing Olympics started today and it just so happened that McDonald’s reported their numbers for July same-store sales. Coincidence? Nah. The company reported a better-than-expected 6.7% increase in its U.S. stores and a 15.9% rise worldwide.

McDonald’s is a sponsor of the games and has done a good job of getting in the public’s eye at the right time. The world’s biggest hamburger chain could soon become the world’s largest chicken chain with its new chicken biscuit breakfast sandwich and its chicken sandwich, which by the way, rivals that of Chick-fil-A sandwich.

Last month, McDonald’s warned of higher beef and chicken costs but has managed those costs extremely well. The dollar menu continues to be a hit and more good things could be in store when the company rolls out specialty coffee beverages in more locations.

The last time I mentioned McDonald’s was on June 30 and at the time I didn’t see any option trades that I liked. I did, however, talk about Sonic (SONC, $15.69, up $0.41) which was trading at $14.42. Sonic was down nearly 50% from its 52-week high and I mentioned the strong support at $14.

McDonald’s was holding up well but I really felt Sonic was a good buy at those levels. The stock was a great buy at $14 but I also liked the December 17.50 calls (ZSQLW, $1.10, up $0.20) which were trading for 70 cents. They were a “lottery pick” but so far we are up over 50%. These calls will be worth at least $2.50 if Sonic can get back to $20 by December 19 but I wouldn’t have a problem if positions were closed here for a 50% profit.

Sonic is no McDonald’s but either way, we’re “lovin’ it”.

Rick Rouse
Rick@OptionsMentoring.com

I had a feeling I would be talking about a lower market in the “weekly wrap-up” and my gut feeling proved me right. It was a terrible week for the market if you were bullish (although the Gold stocks did well) as the bears came out in force to push the Dow to its lowest level in nearly two years. Four words for you leading the debacle: Oil, Banks, Housing and the Dollar. These are the real “Four Horsemen” of the market right now.

This past week, the Dow plunged 496 points, or 4.2%, to finish at 11,346. The S&P 500 dropped 40 points, or 3%, to close at 1,278. The Nasdaq fell 91 digits to end at 2,315, a 3.8% decline. In case you are keeping score, in two weeks the Dow has lost over 900 points…

The focal point of the week was the FOMC meeting. The Fed did nothing meaning they will likely keep rates steady for the near-term. However, oil took center stage once again and higher gas prices are affecting a number of stocks in different sectors.

Nobody is buying new cars. Ford (F, $4.98, down $0.09) lost $0.83 for the week and General Motors (GM, $11.55, up $0.12) lost $2.24 with Friday’s 1% gain. And let’s not forget CarMax (KMX, $14.85, down $0.08) which continues to set new 52-week lows.

And what about the Restuarant stocks? Punished. Sonic (SONC, $14.42, down $0.11) is down nearly 50% from its 52-week high. Jack in the Box (JBX, $23.02, down $0.36) is down from a high of $36. McDonald’s (MCD, $56.50, up $0.05) has held up rather well but I’m really starting to like Sonic at these levels. I’m not sure on the options yet because I still think the stock could head lower although support is strong at $14. However, if Sonic can’t hold $14, it could be headed to $10. Write this one down and check it around Christmas as a lottery pick…The December 17.50 call (ZSQLW, $0.70, unchanged) will be worth at least $2.50 if Sonic can get back to $20. These are the farthest out options available right now for Sonic and if the stock is at $18.20 by 12/19/08, we break even. That might be asking a bit too much from the options but buying the stock at these levels could be worth it in a couple of years.

Same thing can’t be said with the Financial stocks. You just can’t trust them no matter how low they are getting. A few are getting so cheap that they are trading for less than half of their book value. Wachovia (WB, $16.22, down $0.70) has a book value of $36 although I really don’t trust that number. It’s getting to the point where Wachovia is getting attractive enough for someone to buy and a nice premium could come. But when? Will a bid come at these levels or will Wachovia keep drifting lower and then a bid for $16 comes? Or will Wachovia dilute shareholder value by raising money and offering more shares? Is bankruptcy a possibility? Do you really trust Merrill Lynch (MER $32.70, down $0.35) with a looming $3-$5+ billion mortgage-related write-down coming when it releases earnings? Merrill has a 52-week high of $89. Keep an eye on the July 32.50 puts (MERSA, $2.16, up $0.05) which were pretty active Friday.

Turning back to oil, OPEC’s president said oil could hit $150 or $170 a barrel this summer. Duh. It closed at a record high of $142 a barrel on Friday. That might now be as high as the $200 some have predicted but either way this is getting absurd and has been for quite some time. Gas at $5? We just recently hit an average of $4 a gallon and now they are saying it could go up another 20% in a month or two? Yikes.

It’s tough to say how this will all shake out but with so many negaitives surrounding the market and no major catalysts in site, we could see a lower market heading into the holiday weekend.

Rick Rouse
Rick@OptionsMentoring.com