Chipotle Mexican Grill, Inc. (NYSE:CMG) announced earnings Tuesday after the close, and so far, shares have done nothing but move lower. That’s because despite better-than-expected earnings, a couple of health-related issues have put fear back in play again, roughly two years after E. coli scares came to roost and knocked CMG stock out from the sky.
Just take a look at the three-month daily chart of Chipotle stock below.
Since the beginning of June this year, you will see the rapid decline. The company beat its earnings-per-share estimates, but as Dana Blankenhorn points out in his latest article, CMG may face an uphill battle with trust.
After their problems started in 2015, he points out that customers may not be ready to come back especially after another recent health scare in Virginia. In addition, he says there is a rule of thumb that says stocks take about 18 months to come back after a scandal. That takes us to 2019.
Chipotle has made a couple of announcements of late meant to renew interest in CMG stock. The company is adding queso — the chain’s “most requested item” — to the menu, and starting to test out drive-through windows.
But it’ll take more than that to cure Chipotle’s near-term ails.
How to Handle Chipotle
We’re in the meat of earnings season, and there’s still a heavy release schedule set for the next couple weeks. If you’ve ever traded over an earnings announcement, you probably know that sometimes what happens is not what you thought what would happen based on the report.
Take for example Alphabet Inc (NASDAQ:GOOGL). After a bullish run ahead of earnings, the stock gapped down after reporting relatively decent earnings. Advertising, paid clicks and total revenue, just to name a few, increased year-over-ear. The $2.7 billion European Commission fine that was paid during the quarter could not be overlooked, but investors knew about it ahead of time. Maybe the increase in shares was priced in ahead of the report?
The point is you never know how stocks will react, and this can make it difficult to trade a company, even after it announces. But with options, you can structure a trade to profit with several different expectations.
Here is what I am thinking.
I’m not sure when CMG stock will finally start to rise, but I don’t it will make a dramatic move higher over the next month. Taking a look at a 15-minute chart of Chipotle just below, you can see a pivot level around $365 that may act as potential resistance if the stock decides to move higher before option’s expiration.
As I mentioned above, option strategies can be structured in many ways. The trade idea below is one of those ways that allows you to profit in three ways.
An Options Strategy for CMG Stock
With this trade, the stock can move higher up to $365 at expiration for max profit, trade sideways or continue to drop and it can profit.
The Trade: Sell the CMG Aug $365 call and buy the CMG Aug $370 call for a credit of 70 cents or more.
The Strategy: The maximum potential profit for this trade is 70 cents ($70 in real terms) if Chipotle shares trade at or below $365 at Aug. 18 expiration. Both call options would expire worthless. The maximum loss is $4.30 ($5-$0.70, and $430 in real terms). This would occur if CMG is trading at or above $370 at Aug expiration. Breakeven is $365.70 at expiration based on a credit of 70 cents.
When selling option premium as part of a spread for this trade idea, you will realize a profit if you can buy back the spread for less than it was sold. This is similar to selling short shares and buying them back for less. Consider it to be a bullish sign and maybe a possible exit point if CMG stock closes above the short call at $365.
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at firstname.lastname@example.org. At the time of this writing, he did not own a position in any of the aforementioned securities.