Chipotle Mexican Grill, Inc. (NYSE:CMG) is long past its glory days on Wall Street. The problems started with devastating headlines of health scares. The stock lost its mojo after that and never recovered.
Perception is that CMG stock management mishandled the situation, so traders sold it in several big step downs in price from $750 per share to current $400 price.
Click to Enlarge While Wall Street hates the stock, Main Street still loves the product. Fans of the restaurant stuck with it. Still, I am not eager to risk $400 per share today in the hopes that it rallies from here.
I won’t argue for Chipotle fundamentals. Instead, I will sell risk against levels I deem safe — meaning it’s easier for me to identify levels against which I can sell downside risk than chasing upside targets. Then I let time do the work for me.
Back in Feb I wrote on how to get free money from CMG. The trade was an easy win for $1.60 per contract in profits.
Today’s trade is merely repeating what worked, only this time I will put more time on the clock to fit my schedule around the fall.
The CMG Stock Trade Idea
The Bet: Sell the CMG Jan 2018 $250 put for $3.50 or better per contract. I need Chipotle stock to stay above my sold put to win. If it falls below that level, I will be put the stock. Anything below $246 per share would accrue losses for me.
In this case I won’t balance my trade by selling opposite risk. I am confident that the distance from expiration would allow me to manage my risk through the short term price gyrations if necessary. To guard over periods of uncertainty, like earnings, I could buy sacrifice shorter-dated puts.
Given that CMG stock is pricey, I will offer a less aggressive alternative.
The Alternate: Sell the CMG Jan 2018 $275/$265 credit put spread and collect $1 to open. The buffer is slightly smaller than that of the sold put but still carries a 90% theoretical chance of success. The maximum yield potential is 11% on money risked.
I am not required to hold my trades open through expiration. I can close them for partial gains or losses at any time.
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.
