Everyone has asked themselves, “What am I going to have to eat?” and for millions, Chipotle Mexican Grill (CMG) has been the answer. Go out and have yourself a burrito while mulling over this trade idea:
Chipotle Mexican Grill (CMG — $408.97): Put Credit Spread
The trade: Sell the August 385/390 Put Credit Spread (selling the August 390 put and buying the August 385 put) for 60 cents or better.
The strategy: The maximum potential profit for this trade is 60 cents and will be collected if CMG is trading above $390 at August expiration. The maximum loss is $4.40 ($5 – $0.60) if CMG is trading below $385 at August expiration. Breakeven is $389.40 at expiration based on a credit of 60 cents.
The rationale: Chipotle announced positive earnings last Friday, sending the stock up more than 8% in the session. The company said net income rose 7.6% year-over-year as traffic increased in its established restaurants. Because of increased traffic, CMG also raised its sales growth outlook for the year. Chipotle also announced that it is scrapping any plans to raise its menu prices at least for 2013, which should be good news for burrito lovers everywhere.
Click to Enlarge CMG gapped over a resistance area (prior pivot high) on its earnings announcement and continued to trade higher for most of the session Friday. When a stock gaps over a resistance area after trading lower for several sessions — like Chipotle had been doing — this is a potential bullish sign.
Another positive bullish sign was that the stock closed above $400; sometimes big, round numbers can act as support and resistance areas for stocks. If that is the case here, then $400 will make a fine support area. The old pivot level around $390 should act as another support area in case $400 doesn’t hold.
Two areas of potential support — just like having two burritos — is always better than one!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.