It seems that the torch of hot restaurant stock has been recently passed from Chipotle Mexican Grill, Inc. (NYSE:CMG) to McDonald’s Corporation (NYSE:MCD). I personally am not convinced that MCD can fill the old Chipotle shoes but today’s write-up is only dedicated to putting CMG stock to work for me.
Sadly we all know the tragic headlines that hit Chipotle a few years ago. In addition to the human suffering, there was tremendous financial pain inflicted on its investors. CMG stock got cut in half before it finally found footing around $353 per share.
Click to Enlarge Since March, Chipotle stock rallied 20% and another 10% since last November. Jumping in with both feet long now and after an impressive run is often fraught with danger.
I am not one to chase prices, especially after a rip like CMG has just had. If I am too late to the party then I’d be buying someone else’s profits. This doesn’t mean that I miss out on the potential here though, as I’ve created CMG income from thin air as recently as April. This wasn’t a fluke as evident by this other recent example where the trade also was an easy win.
As long as I have a thesis, I can use options to make it pay me without needing to be surgical with timing and entry levels. This sounds easy but I don’t do this without the proper homework or without researching the appropriate levels, so there is work to be done.
Now, with multiple set of profits in hand, I get to reset another trade but on a different timeline.
CMG Stock Trade Idea
The Bet: Sell the CMG Dec $390/$385 credit put spread. This is a bullish trade for which I collect 80 cents to open. Here I have a 90% theoretical chance of retaining all my premium for maximum profits.
Usually I like to sell upside risk for balance, but in this case I have to be willing to face the potential of an upgrade cycle. Analysts are overly humble, with most CMG ratings at a hold. So even though it carries a giant 148 price-to-earnings ratio, when one analyst dares to upgrade CMG many could follow thereby causing a spike.
The Hedge (Optional): Sell the CMG Dec $575/$580 credit call spread and collect an additional 80 cents per contract.
Taking both trades would result in a sold iron condor that, if successful, would yield up to 40% on risk. With a +/-19% buffer from current price, I am confident that I will be able to manage the risk against short-term price gyrations.
E-mail sellspreads@gmail.com with questions or join me to learn more about options 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.
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