Chipotle Mexican Grill, Inc (CMG) has had a challenging year, shedding 30% over the past 12 months. A slew of health issues triggered Chipotle’s downward spiral, but prior to its debacle, CMG was a Wall Street darling.
Click to Enlarge Chipotle consistently delivered incredible comparable sale performances. But that all ended with the onslaught of health-hazard headlines.
CMG was once perceived as offering responsibly prepared healthy food, but the E. coli outbreak directly neutralized this primary asset for turning strong comps. Consequently, CMG stock has suffered tremendously, demolishing its upward momentum.
Since then, Chipotle’s management has been trying to bring back traffic with costly incentives. This will continue to impact Chipotle’s P&L, and consequently challenge its stock price.
It will take time, however, to recapture its reputation and strong comps.
My last trade on CMG stock was a short strangle that netted me over $5 per contract sold. I plan on repeating this performance here with a similar setup.
CMG Stock Options
For this (in addition to CMG stock range), I have to consider the trend of the general markets. I believe that markets are a bit challenged near all-time highs, so I will be cautiously optimistic.
Trade #1 – The Bullish Bet: Sell the CMG Jan $280 put. This is a bullish bet for which I collect $4.50 per contract. This opens downside risk if Chipotle stock falls under my put strike price this year. My losses would extend under $280. My breakeven for this trade is $275.50 per share. To mitigate my risk I will add a second trade of a bearish bias. This would buy me time to react if price moves against me on the bullish trade.
Trade #2 – The Hedge: Sell CMG $650 Jan call. This is a bearish trade for which I collect an additional $2.50 per contract. This opens upside risk if CMG stock rallies past my sold call price this year. My CMG breakeven on this side alone is $652.50 per share.
Taking both trades would constitute a sold strangle. Ideally, I would need CMG to stay between $280 and $650 per share through mid-January. My combined credit is $7 per contract. This improves my breakeven points to $273 per share on the downside and $657 per share on the upside.
Bottom Line on CMG
Chipotle reports earnings in July. So for that period, and if I am still in the trade, I would spend a few pennies to guard against risk for my sold strangle. These would be small expenses for a large dose of peace of mind.
I am not committed to holding these trades through expiration; I can close either for partial gains or losses at any time.
It is important to note that you should only sell naked puts if you’re willing and able to own the stock at the strike price if CMG falls below it. You also have to be able to cover losses if it rallies past the sold calls.
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.
