Chipotle Mexican Grill, Inc. (NYSE:CMG) is rallying on its first-quarter earnings report, but it’s still far away from all-time highs. Fundamental investors lost money trying to catch CMG stock as a falling knife a few times, so they gave up on it for a while. They’ve only started dipping their toe in the water on the long side again.
But we continued profiting from Chipotle stock using options, whether it was to trade the ranges for free money, or create income from long trade not once but twice — and as recently as a week ago.
So what now after this stellar earnings report?
Fundamentally, the consensus from earnings is that Chipotle’s comparable-store sales were impressive and that company could be indeed back on track. For me, I just can’t call Chipotle cheap considering it still sells at 580 times earnings.
I’m not calling it a short here; in fact, just the opposite. There are too few optimistic analyst ratings, so we can expect several upgrades to CMG stock soon.
Therein lies our opportunity.
Click to Enlarge Technically, I don’t like to chase stocks in a mega-rally. As a conservative trader, I can’t justify risking almost $500 per share at face value and without any room for error.
But that doesn’t mean that I sit this one out and miss the opportunity.
The Trade on CMG Stock
The bet: Sell the Dec $400 put for $13 per contract. This trade has an 80% theoretical chance of expiring for maximum gains. If Chipotle falls below my strike, I would break even at $387 per share.
Usually I like to sell opposing risk to balance my trade — a hedge of sorts. But in this case, I will delay entry in anticipation of the potential upgrade cycle that has been long overdue. The setup in CMG stock should resemble the following:
The hedge (optional): Sell the Dec $600 call and collect an additional $7 per contract thereby creating a bigger breakeven buffer.
Selling naked puts is daunting and dangerous, so to mitigate the risk, I can turn each leg into a sold spread and still yield almost 50% combined on money risked.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.
