Chipotle Mexican Grill, Inc. (NYSE:CMG) isn’t back yet, but that doesn’t mean investors can’t profit. In fact, an out-of-the-money, mildly bullish vertical looks made-to-order for a channeling Chipotle stock. Let me explain.
Back in late July and with similar sizzle on display in the broader market, I mused whether a double-bottom would prove tastier than a double cheeseburger from fast-fresh-food operator Chipotle’s new venture.
The jury is still out on the latter topic. The first Tasty Made joint — Chipotle’s entry into the burger space — just opened late last month. However, in the first inning it appears customers aren’t buying what corporate is selling.
As for the technical situation, there’s no denying CMG shares have seared and flipped bulls around like carne asada inside a burrito the past couple months.
The good news for investors is despite a steady and negative media assault and high short interest, the bears’ inability to sink their teeth deeper into CMG suggests bulls may now have the upper hand.
CMG Stock Daily Chart
While bulls are thought to have the upper hand, don’t expect Chipotle stock to sizzle higher anytime soon. In our mind, the CMG channel formation looks similar to a burrito, when all of a sudden, and much like the real deal, some of the innards popped out.
CMG stock’s brief rupture to the downside was the result of bulls and bears reacting negatively to earnings. Between food scares, avocado shortages, calorie miscounts, new concept restaurants and continued sales declines; maybe it’s hard to blame investors?
What we’re more confident about is the subsequent and equally aggressive action by investors to buy and/or buy back shares of Chipotle. The rally from CMG’s early November low was forceful and a possible game changer for bulls.
As noted, I personally doubt CMG will rally strongly in the near-term. The fact is Chipotle stock isn’t the growth story it once was. Even if there is a second act for investors to get really excited about; I’m guessing that type positive narrative is still a quarter or two out.
At the same time, ignoring Chipotle’s bullish price action in the face of strong negativity surrounding the stock, appears to be a mistake. This seems especially true since investors can place a mildly bullish spread from CMG’s options menu near channel support.
Chipotle Stock Bullish Strategy
Reviewing Chipotle stock’s options board, one spread which fits nicely into our modestly bullish thesis is the Dec $385/$380 bull put spread.
Priced for about $1.25, the credit vertical in CMG maintains a margin of safety of nearly 4% before losses begin to accrue on an expiration basis. Above $385, the entire credit is kept.
With the spread’s max risk established at $3.75, the potential return works out to 33% in one month. Even better, capturing the credit only requires CMG to not slip so hard that it breaks key support near $385 for a second time.
If the spread trader desires to be a Chipotle stockholder through assignment of the short put, the highest they’d pay is $383.75 based on the sold $385 put and subtracting the $1.25 credit.
Also a feature to consider, the trader’s effective entry price for Chipotle stock is never more than $3.75 above the market price because of the vertical’s limited-risk feature. Bottom line, if CMG were to tumble lower that benefit would certainly come in handy when deciding to buy shares at a nice discount to today’s price near $400.
Now that’s some food for thought worthy of chewing on.
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.
