Chipotle Mexican Grill, Inc. (CMG) lovers aren’t the only once being sickened by the norovirus linked to the hyper-growth restaurant chain.
Chipotle’s stock price has also fallen ill dropping some 32% before finally rallying back this week. Spurred on by an apology by founder and co-CEO Steve Ells and a promise for renewed emphasis on food safety, Chipotle stock rallied 5% in Thursday’s trading session.
CMG is actually up 12% since Monday’s low, making this week one of the best performing weeks in months for the stock.
As impressive as the rebound has been, however, the price structure of Chipotle stock’s trend remains a mess.
For all its fury the rally was only sufficient in carrying CMG stock back to its declining 20-day moving average.
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What’s more, the stock has yet to break back above any type of resistance level, making the rousing rally suspect.
I will say the best thing Chipotle stock bulls have going for them is the massive level of volume seen throughout the week. Volume surges like this after a stock has already fallen 30% often signal capitulation, or an end to the bears’ dominance.
While the bulk of the pain may well be over for CMG shareholders, I suspect the recovery will be far from easy. A number of resistance levels loom overhead that should slow further rally attempts.
Plus, corrections the size of what we’ve seen in Chipotle usually hang over the stock for a spell, requiring weeks of basing, or back and forth action, before a full-fledged recovery takes root.
Bank on Chipotle’s Recovery Failure
On the options front, CMG stock options are understandably juiced. The implied volatility rank is 71%, placing IV well into the upper half of its one-year range. That means Chipotle stock options are still expensive, giving option sellers the upper hand here.
If you, too, think Chipotle will have trouble rallying much further, consider selling January bear call spreads. Sell the Jan $640/$645 call spread for 65 cents.
Think of it as a wager that Chipotle stock price will fail to rise above $640 by expiration. Provided the stock remains below that level the calls will expire worthless allowing you to pocket the initial 65 cents of premium.
The risk is limited to the distance between strikes minus the 65 cent credit, or $4.35, and will be lost if CMG sits above $645 at expiration. To minimize the loss I suggest exiting if CMG rises to the short strike of $640.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
