As we move closer to Christmas, trading volume will surely start to decrease but that doesn’t mean there aren’t trade opportunities out there. Here is a short credit spread trade idea on a stock that looks like it has halted its decline just in time for the New Year.
Chipotle Mexican Grill Inc. (NYSE:CMG) Put Credit Spread
The trade: Sell Dec. 28 275/280 Put Credit Spread (selling the Dec. 28 280 put and buying the Dec. 28 275 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is $0.50 if CMG is trading above $280 at Dec. 28 expiration. The maximum loss is $4.50 ($5 minus 50 cents) if CMG is trading below $275 at Dec. 28 expiration. Breakeven is $279.50 at expiration based on a 50-cent credit.
The rationale: CMG certainly has had a rough 2012. The stock has fallen dramatically the last couple of earnings announcements. The company reported a weaker sales outlook for next year than was previously anticipated but profit increased last quarter roughly 20% with sales increasing 18%. Even though the outlook has changed the company still appears to be fundamentally strong.
Technically the stock just broke through a resistance area around $280 which it hasn’t been able to do in two months. CMG than ran into some more resistance around $297 and has pulled back giving option traders an opportunity to sell premium. If the stock decreases, prior resistance should now become support at $280. This should keep the stock from moving through that level through the Christmas week barring any unexpected news.
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