In Feb I wrote about how to get free money from Chipotle Mexican Grill, Inc. (NYSE:CMG). The trade yielded $1.70 per contract in pure profit. Since then CMG fundamentals have not changed much. They’ve had a few headlines but mostly regarding the behind-the-scenes moves that are not price-inflammatory.
CMG the restaurant still has its devout fans. I still see customer lines during rush hours. But Chipotle stock has still not yet regained its uber-bulls back.
Since its unfortunate health debacle, CMG has been throwing burritos and the kitchen sink at the problem but has yet to completely recover from it. Even when they do, I believe that they will need a miracle headline to regain the stock highs.
Click to Enlarge Technically, CMG stock is choppy but stuck in a range. Today I want to sell risk against that range. The trick is to find resistance and support levels then sell the risk behind them with confidence.
CMG Stock Trade
The Bullish Side: Sell the Sept CMG $320/$315 credit put spread for 70 cents per contract. This is a bullish trade that has a 90% theoretical chance of yielding 15% on risk.
I usually don’t like to bet the against success of companies but I sometimes need to do it to balance my bets. In this case it’s up to the individual portfolio. I could only sell the downside risk especially in this animal-spirited market.
The Bearish Side (Optional): Sell CMG Sep $495/$500 credit call spread. This is a bearish trade for which I collect an additional 70 cents per contract. Theoretically, this side has a 90% theoretical chance of yielding 15% on risk.
Taking both trades would put me in a sold iron condor. This is a range-bound trade that needs CMG stock to stay between both spreads sold. Since I can only lose on one side or the other, taking both sides would reduce my money at risk compared to taking only one. Potential yield if the iron condor is successful is 35%.
Weighing risk of incident versus dollars at risk: I can modify the bullish bet into a naked $270 put sold for $2 per share. But I have to be willing and able to buy CMG stock at that price. If they fall below my strike I will be put the shares. The advantage here is a bigger reward with a wider price buffer but with open-ended risk. The $280 naked put I have a 30% buffer from current price.
Nicolas Chahine is the managing director of SellSpreads.com. Learn options as easy as 1-2-3 here. 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.