Chipotle Mexican Grill, Inc.: How to Buy CMG Stock Well Done

Advertisement

Is a double bottom tastier than a double cheeseburger from fast-fresh food operator Chipotle Mexican Grill, Inc. (NYSE: CMG)? Time will tell, but ordering a modified CMG options spread after this week’s nibble on Chipotle stock by investors, looks appetizing.

Chipotle Mexican Grill, Inc.: How to Buy CMG Stock Well Done

Let me explain.

This week’s earnings report in Chipotle came in light, as profits of 87 cents missed Street forecasts of 93 cents. Nevertheless, the result was a large step in the right direction following last quarter’s first-ever reported loss in Chipotle stock of 88 cents.

The back-to-back earnings woes and tied-at-the-hip sales disappointments have largely been the challenge of winning back customers following this past year’s E.coli and Norovirus outbreaks. No doubt it’s a process, but one an able Chipotle management team is more than able to navigate.

The good news in the here and now is Chipotle stock did find investors willing to take a nibble following the headline disappointment. Shares were up by roughly 6% on the heels of the report.

Maybe also pushing investors back into CMG is the one-time growth juggernaut having fallen a rough and tumble over 40% over the past year from its all-time-highs near $758.

Yummy, right?

In truth, I’d be remiss if Chipotle stock’s short interest of nearly 19% wasn’t mentioned. Sometimes those bearish traders do have a habit of gnawing on themselves. Nonetheless, the fact shares were up on perceived bad news does hint at bullish underpinnings for CMG looking forward.

There’s also Chipotle’s panned entry into the burger world with its Tasty Made franchise to consider. Logically and given the short interest, if investors were really upset with Chipotle not being focused on its bread and butter — or more aptly, its big burrito — shouldn’t CMG have gotten crushed this week?

Net, net there’s definitely some food for thought when it comes to why CMG failed to head south. There’s also Chipotle stock’s tasty chart which may provide additional clues.

CMG Stock Weekly Chart

072816-cmg-weekly-stock-chart
Source: Charts by TradingView

Looking at Chipotle stock’s weekly chart, I’ll be the first to admit a bullish write-up on CMG two months ago didn’t pan out. A higher low double bottom pattern formed off Chipotle’s key 50% retracement and support line dating back to 2009 — failed to hold.

Despite the failure, though, bears were contained in pressing Chipotle stock to fresh relative lows. And after four weeks of tight consolidation just below CMG’s January low, shares reversed higher to form a lower low version of the double bottom.

Now, with CMG shares having formed a four-day simple pullback to test the 50-day simple moving average (not shown) following its bullish post earnings reaction; traders buying into a a sustainable bottom in Chipotle stock may want to order a limited risk strategy off the options menu to improve their odds.

CMG Stock Bullish Butterfly Strategy

Reviewing Chipotle stock’s options, one spread which fits nicely into our bullish thesis is a modified September $430 / $450 / $460 call butterfly. Priced for around $6 per spread or less than 1.5% stock risk, this strategy allows for a max profit of $14 at expiration if CMG rallies to $450.

The return of 233% is certainly possible given that Chipotle stock has a history of showing it’s capable of moving more than the required 5% over several weeks.

On the other hand, given this is a butterfly spread, the real crux to maximize profits is the precision required of CMG shares landing on the $450 strike on expiration. Let’s just say that would be incredibly rare.

The real upside of not achieving the butterfly’s max profit is the much more likely outcome of not losing money if Chipotle stock rallies too aggressively.

Unlike a regular butterfly which would lose the debit above the highest positioned strike, this modified spread is guaranteed a profit of $4, or 67%, if Chipotle stock is above the $460 call strike at expiration.

The guaranteed profit is due to the bullish embedded vertical having $20 profit potential versus the higher bear call spread’s $10 of risk plus the $6 cost to purchase the modified CMG butterfly.

Bottom line, this bullish butterfly keeps the cost down relative to other strategies and won’t lose if our technical expectations are topped with a raging side of bull in Chipotle stock — and that’s something we don’t mind paying a little extra for.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

More From InvestorPlace

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/07/cmg-buy-chipotle-stock-well-done/.

©2024 InvestorPlace Media, LLC