The market mix-up that rocked stocks in October was one for the record books. The Dow Jones Industrial Average ascended 1,378 points marking its largest monthly point gain ever. And yet, not all stocks participated in the scorching rally. Some poor saps were sunk by weak earnings announcements.
Count Chipotle Mexican Grill (CMG) among the ranks of the torpedoed. The hyper-growth burrito chain dared to disappoint the Street and was dealt a swift kick to the shins.
Analysts expected CMG to deliver earnings of $4.63 per share during the company’s Oct. 20 announcement. What came out of the kitchens, however, was an underwhelming $4.59 that disappointed burrito enthusiasts across the land.
Since the post-earnings gap, we’ve seen little by way of improvement. CMG stock remains firmly beneath all major moving averages, giving little for chart watchers to get excited about. Until Chipotle can remount the 50-day and 200-day moving averages, any and all rallies should be eyed with skepticism.
For now, the stench wafting from Chipotle’s earnings miss is keeping buyers at bay. Friday’s breakdown in CMG stock below short-term support at $645 may well kick off another sharp descent. In forecasting the eventual depths CMG could descend to, I suggest keeping an eye on the $600 zone. There is plenty of price memory in that area, and it’s the next major support level on the charts.
Profits Await in CMG Stock Put Spreads
Traders looking to score from additional downside in CMG stock should look to put spreads. Buying options is a fair bit cheaper than it was prior to earnings given the sharp drop in implied volatility we’ve seen. Rather than buying CMG puts outright, which requires a fair bit of capital given Chipotle’s lofty share price, you could buy a put spread.
Buy the Jan $640/$610 put spread for $11 or better. The vertical spread consists of buying the Jan $640 put while simultaneously selling the Jan $610 put. The max risk is limited to the initial $11 debit and will be lost if CMG sits above $640 at Jan expiration.
The max reward is limited to the distance between strikes minus the net debit, or $19, and will be captured if CMG stock falls below $610 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
