Chipotle Mexican Grill, Inc. (NYSE:CMG) is a momentum stock, so when CMG stock moves … it moves. Momo stocks usually run much faster than other stocks, so most investors feel trapped outside of trading them. On the way up, we’re scared that we’ll enter too late and buy someone else’s profits. When they’re falling, we’re terrified that they’re heading to zero.
Prior to its health debacle, Chipotle was a Wall Street star. It set an incredible string of comparable-store sales growth that other restaurants could only imagine.
But then disaster struck, and CMG stock lost its mojo. It became toxic to investors. Those who tried to catch the knife in 2015 likely lost a few fingers as the stock fell more than 40% and fast.
For the past few months, however, the range trade in Chipotle has been successful, with a clear yet wide trading zone.
Lately, the company has had a few favorable mentions, and as a result, Chipotle stock is at the upper end of that range. Moreover, it’s looking like it wants to break out. Still, going from here looks daunting … and at $477 per share, it would be a sizable gamble.
Click to Enlarge Assuming that the fundamentals and the momentum are indeed on track, the technicals still are a little worrisome. The $480/$500 area has been a long-term pivot point, and since CMG shares lost the level in 2015, it has yet to retake it. There’s fear of this level becoming forward resistance.
Chipotle stock did make progress upon overcoming a similar pivot zone around $445, but there are no guarantees that the bulls can repeat at $500 per share.
I’m a conservative, fundamental trader, so I can’t in good conscience put $477 at risk here, especially without any room for error. So instead of buying CMG stock, I will use options to cautiously go long it through the next few months.
The premise here is that the worst case has already been set. I am committing long now through September, but against proven support zones and with a 24% margin for error.
How to Trade CMG Stock
The bet: Sell the Sep $360 put naked and collect $3 per contract. This is a bullish trade that has a 90% theoretical chance of success. If Chipotle falls below $360, I am willing to own the shares and suffer any losses that may come below $357.
Usually I like to balance trades by selling opposing risk, but given the size of the buffer from current price and the time until expiration, I would rather sit unhedged long in CMG stock for now. I am confident that I can manage the risk against short-term price drops.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.