Chipotle Mexican Grill, Inc. (NYSE:CMG) bulls are showing signs they want back in. But for investors agreeable to re-entering CMG stock, a limited-risk and “fresh-fast” bullish spread from the Chipotle options menu looks made to order. Let me explain.
It has been a long year and change for CMG and its shareholders. Finally though, after multiple bottoming attempts on the heels of a lengthy corrective move exacerbated by 2015’s food scares, Chipotle’s “Guac-a-Mole” pattern of shares popping their head up only to get clubbed lower may be over.
Supporting our optimism, which mind you comes with a side of contrarianism, Chipotle has seen a return of positive comps following massive declines in customer foot traffic since the scandals first broke in 2015. On Jan. 10, the fast-fresh operator announced December same-store-sales jumped 14.7%.
Behind the number though, and as bears might quickly point out, last December’s queasy sales were an easy bar to beat.
Management at Chipotle acknowledged as much in guiding sales growth through 2017 in the high single digits, but stressing the forecasted increases aren’t indicative of staunch, organic growth.
Nevertheless, this analyst maintains the sales updates are still a small step in the right direction for CMG and its shareholders. I also believe the company’s relatively small, but announced, $100 million share buyback is worth appreciating as a positive.
Lastly and nice to see on the price chart of CMG, if we’re to believe the market is a forward-looking mechanism; there’s that “Guac-a-Mole” pattern in Chipotle stock we noted earlier and one that appears to have been eradicated.
CMG Stock Daily Chart
Looking at the CMG chart over the past year and as Chipotle worked its way through the sales damage inflicted by its food scare and other bad press ranging from avocado shortages, caloric miscounts and Chipotle’s recent foray into the burger space with its Tasty Made chain, a bearish “Guac-a-Mole” pattern as I’ve detailed in the provided daily chart appears to be done harming investors.
From the lateral consolidation pattern which hammered every attempt at CMG rising higher, a neutral symmetrical triangle pattern emerged over the last two months of 2016 before investors managed to break CMG bullishly above pattern resistance.
The decent price action was reinforced with a forceful bullish gap on Jan. 10, but one challenged by the 200-day simple moving average. Now and after nearly two weeks of consolidating just below the key trend-line and a successful test of the prior price gap, CMG is back above the long-term average for the first time since late October 2015.
The bullish movement in Chipotle stock is somewhat tarnished by weak volume, but overall this strategist believes upside of 5% to perhaps 10% is possible.
Further, with earnings due next week, a move of this magnitude certainly looks plausible given CMG’s history of powerful reactions to its quarterly corporate confessional.
Chipotle Stock Bullish Strategy
Reviewing Chipotle stock’s options board, one spread which fits nicely into our bullish thesis is the modified or “fast-fresh” 3 Feb $425/$440/$450 call butterfly for $3 or better.
The short-term and bullish-positioned butterfly’s sweet spot is at $440. If CMG found itself finishing on the strike at expiration, the modified position could land the trader $12 in profit, or 400%
In truth, the max payoff is a very-low-probability event. But, given this spread expires the day following next Thursday night’s earnings and requires a move of just over 5% in CMG, it is easy to think some type of healthy gain is possible.
Lastly, this CMG butterfly is modified so the embedded $440/$450 bear call spread is tighter than the lower $425/$440 bull call spread. Making a profit and keeping a $2 portion in the event of an abnormally large move, is also a fresh idea on a classic butterfly position.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.