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Chipotle Rewards Volatility Sellers

Iron Condor trade benefits from Chipotle volatility crush


The pre-earnings volatility buildup in Chipotle Mexican Grill (NYSE:CMG) turned out to be much ado about nothing. Option buyers saw their hopes for some type of monster gap dashed as the stock opened Friday’s post-earnings session virtually unchanged. Despite the one-day April straddle pricing in a 5.5% move, CMG dropped only half a percent in early trading and closed off 2.7% for the day.

The action in CMG’s stock price and implied volatility of late exemplifies how earnings play out for most stocks. The volatility bid-up was on the high side and the earnings gap fell short of expectations. Though the occasional announcement will blow the socks off of volatility sellers, such is the exception, not the rule.

Source: Livevol Pro

Source: Livevol Pro

In How to Trade Chipotle Volatility Ahead of Earnings we highlighted a May iron condor sale involving the 380-385 bull put spread and the 480-485 bear call spread. At the time 30 day implied volatility was sitting at 34% and the condor could be sold for around $1.27. Fast-forward to Friday morning and with implied vol dropping to 28% and CMG barely budging, the condor dropped to 65 cents. The chart of implied volatility is attached.

The dilemma facing traders at this stage is when to take profits. If the initial intent of the iron condor was to exploit the post-earnings volatility crush, then mission accomplished.  Take the money and run.

If traders anticipate CMG will continue to trade in a range over the next few weeks, they may consider remaining in the position until the spread has dropped closer to 30 cents of even 20 cents in value.

At the time of this writing, Tyler Craig had no positions on CMG.


Article printed from InvestorPlace Media,

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