Chipotle Mexican Grill, Inc. – 2 Spicy Trades for CMG Stock

Chipotle Mexican Grill, Inc. (CMG) steps onto the earnings stage after the close Tuesday for its first report since taking a severe beating on norovirus and E. coli outbreaks at several of its restaurants. Investor sentiment reflects a growing disdain for the shares.

However, CMG stock has recently bounced off technical support and pulled key moving averages into a bullish cross. If the company can set things right with earnings, CMG has the makings of a potentially impressive contrarian play.

Diving into the numbers, Chipotle is expected to plunge more than 100% to $1.86 per share from $3.84 per share in the same quarter last year. Revenue, meanwhile, is seen falling roughly 5.8% to $1.01 billion. Historically, Chipotle missed Wall Street’s target last quarter, but had bested the consensus in the previous four quarters.

With expectations lowered following last quarter’s miss, Chipotle has a chance to surprise. However, the discerning trend this earnings season has been to top expectations but guide lower. As such, Chipotle stock could take a serious hit if the company shows a lack of confidence in its future.

Turning toward the sentiment picture, the brokerage community more than has its doubts about Chipotle’s ability to bounce back from its current predicament. Data from Thomson First Call, for instance, reveals that CMG has attracted 12 buys compared to 19 holds and two sells. Furthermore, the 12-month consensus price target of $465 represents a nearly non-existent premium of just 2% to Thursday’s close.

Even short sellers are getting in on the act. As of the the most recent reporting period, some 2.5 million CMG shares were sold short. Currently, this short position represents a more than healthy 8% of the stock’s total float.

The bears are running rampant in the options pits as well. As of the close on Thursday, the February put-call open interest ratio came in at 1.21. The real story here, however, lies with the weekly Feb. 5 series, where the put-call OI ratio rests at a quite bearish perch of 2.71, with puts nearly tripling calls among options most affected by Chipotle’s quarterly report.

01-29-2016 CMG
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Overall, weekly Feb. 5 series implieds are pricing in a potential post earnings move of about 9% for Chipotle stock. This places the upper bound at $496.17, while the lower bound lies at $413.83.

Technically, CMG has bounced off support at $400, overtaken former resistance at $450, and pulled its 10-day and 20-day moving averages into a bullish cross. The shares are still staring up at significant resistance at $475 and $500, and nothing less than a stellar quarterly report will allow CMG to top the latter.

2 Trades for Chipotle Stock

Put Sell: With a budding technical rebound and a wealth of potential sideline money (i.e. plenty of bears to convert into bulls), there is certainly the potential for a significant rally. However, I’m not willing to take a risk on Chipotle’s guidance at this time.

For those with a similar neutral-to-bullish stance on CMG, a weekly Feb. 5 series $380 put sell has a good chance of finishing out of the money when these options expire at the end of next week. At last check, this put was bid at $3.50, or $350 per contract. On the upside, you keep this premium as long as CMG stock closes above $380 when Feb. 5 series options expire. On the downside, should CMG trade below $380 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $380 per share.

Put Spread: For those siding with the bears heading into next week’s report, a Feb. 19 series $400/$450 bear put spread has potential. At last check, this spread was offered at $15, or $1,500 per pair of contracts. Breakeven lies at $435, while a maximum profit of $35 is possible if CMG closes at or below $400 when February options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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