Free Profits on the Menu in Chipotle Mexican Grill, Inc. (CMG) Stock

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Last December, Chipotle Mexican Grill, Inc. (NYSE:CMG) stock finally cemented its turnaround in my opinion. It took long time to recover from the health disaster, and in March the stock mounted an emphatic 20% rally. In all it rallied over 30% to plainly state that at $420, CMG stock was too low.

Free Profits on the Menu in Chipotle Mexican Grill, Inc. (CMG) Stock

Rejecting a bottom is not the same as saying chase the hopium. It does, however, give me something against which to shoot. And I prefer generating income by selling risk against proven levels of support.

My last trade on CMG yielded easy profits and I am confident that I can repeat performance. But this time, I want to also short the stock price action. This would not be a dis against the company’s prospect but a mere bet on the short term price gyrations.


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My thesis is that Chipotle stock, although carries upside momentum, is temporarily vulnerable to a technical dip. For the past few weeks, CMG has been knocking on a floorboard from lower highs and if it breaks, bears will try to retest $455 per share.

No I am not brave enough to short the stock outright, but I am comfortable buying a few puts to capture the downside if it comes — especially if I structure a trade that is cost neutral.

Today’s trade will be twofold, where the end result will be a credit. I only do this with worthy tickers whose fundamentals are good enough so that I can trust finding support levels that I can leverage.

CMG Stock Trade Idea

The Short Side: Buy CMG June 30 $462.50/$460 debit put spread for 70 cents. This is my maximum risk. I need price to fall through my spread to profit — the faster the better.

To eliminate my out-of-pocket expenses I will sell downside risk against support levels to generate income.

The Bank: Sell Sep $385 CMG puts and collect $3 to open. Here I have a 95% theoretical chance to retain my maximum gains. But if price falls below my strike I own the shares and would suffer losses below $382.

The end results of taking both sides is a net credit, so as long as price stays above my sold strike, any premium I recover from selling the premium I bought is pure profit.

This way I don’t need price to move my way to necessarily profit. But ideally, I want CMG stock to fall through my debit put spread so I can book as much premium as possible but then stabilize and hold above the September puts sold.

There isn’t one perfect way of managing this pair trade but it should allow for plenty of opportunity to squeeze profits with relative certainty.

I do have to note that the stock is not cheap. It carries an extremely high PE so if I am not willing to own the shares I should sell a put spread instead of naked puts. Analyst expectations are tepid so this raises the chances of positive upgrade headlines.

Selling options is risky business so I never risk more than I can afford to lose.

Learn how to generate income from options 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/chipotle-mexican-grill-inc-cmg-stock-profits-free/.

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