Beleaguered bulls in Chipotle Mexican Grill, Inc. (CMG) finally received the respite they were seeking which arrived in the form of a rousing 14% rally. While the snap-back was long overdue, it appears our bearish overlords are about to cut the reprieve short.
News that the popular burrito restaurant chain is closing all its restaurants for a spell to get a handle on the ever-growing food safety concerns hit the wires this morning. Chipotle stock is poised to gap 3.5% lower erasing all of yesterday’s gains.
Welcome to bear markets.
But really, Chipotle stock watchers should be viewing any and all rallies with skepticism at this point. Whenever CMG stock finally does mount a sustainable comeback, it will be a long, drawn-out affair riddled with numerous false starts.
Count this week’s failed bounce attempt the first among many … though buyers certainly gave it the old college try.
Volume exploded during the two-day pop revealing some serious participation. While I suspect the surge was driven in large part to short covering, there were probably some bottom fishers thrown into the mix as well.
Those hoping that this is the beginning of a bottoming process for the Chipotle stock price will want to see this week’s lows at $400 hold on any type of retest in the coming days.
A Trade on Chipotle Stock
If, like me, you’re skeptical of Chipotle’s pop, consider selling bear call spreads. By selling out-of-the-money calls, we can structure a trade positioned to profit if Chipotle stock does anything but rally strong from here.
The elevated implied volatility in CMG stock options is inflating option premiums allowing us to score a higher credit for any and all short option trades.
Sell the Feb $515/$520 call spread for $1 or better. The max reward is limited to the initial $1.00 and will be captured if Chipotle stock price sits below $515 at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $4.00, and will be lost if CMG stock rises above $520 by expiration.
To minimize your loss you could consider exiting if CMG rises to the short call strike at $515.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
