Chipotle Mexican Grill, Inc. (NYSE:CMG) is falling again on yet another headline. I’ve been trading it all year with great success.
In my last write up on it I sold a strangle that netted me $5 per contract with zero drama.
Also recently I successfully traded for my subscribers with an iron condor that still is in the sweet spot. It can be booked for most of the profits.
Today I want to find another range against which I can sell risk for income generation.
Chipotle the company is not broken. CMG was not the first restaurant to be hit with sickness headline and it won’t be the last. What is broken is part of the Chipotle stock.
Click to Enlarge For years, Wall Street gave CMG stock a premium based on its incredible ability to beat its comparable sales quarter after quarter. The foundation of its amazing sales growth was the quality of their food. The persistence of the headlines and the severity of the sicknesses eliminated that asset. Now CMG needs to convince traders that it deserves its still high valuations.
The good thing is that most analysts have already shifted their expectations lower. The valuation however is still lofty so the risk for lower prices still exists. Any bullish trade in CMG stock should include a healthy buffer from current price or a hedge of sorts.
CMG Stock Trades
Trade No. 1 — The bullish bet: Sell Jan CMG $330/$320 credit put spread. This is a bullish trade for which I collect $1 or better to open. Going long at that level gives me a 21% price buffer and a 85% theoretical chance of success. The yield if successful would be 10% on money risked.
I usually like to hedge my bets. In this case, I don’t like to sell a credit call spread on a -4% day for CMG. So I will snipe an entry point but won’t set the trade until I see how this drop settles.
Trade No. 2 — The Hedge: Sell CMG Nov $485/$495 credit call spread. This is a bearish trade for which I collect 55 cents per contract. This trade has an 85% theoretical chance of success and a 15% buffer from current price.
I have to note two headline risks between now and expiration dates. First we have the U.S. elections. If Donald Trump wins, markets could have a tizzy. Second, CMG reports earnings in October and those are always a potential catalyst for giant moves.
I am not obliged to hold these trade into their expiration, and can close either at any time for partial gains or losses. I rarely carry a credit spread into expiration — 2016 taught me to not overstay my welcome in winning trades.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
