Chipotle Mexican Grill, Inc. (NYSE:CMG) stock has had difficulties regaining Wall Street’s trust after the fallout from the health issues they had in the past two years. CMG stock has fallen 20% in 12 months. It is now almost 60% off of its all-time high. I bet it will never become the rising star it once was.
This is not to say that I’m bearish on the price action. In fact, today I want to place a bullish bet on Chipotle as I have been doing for months.
Back in August when everyone hated the stock and when the $300 per share line was in jeopardy, I sold downside risk, which paid me over $2.00 in profit with no money out of pocket.
Today I want to repeat the process for the next few months. So again, I want to bet that the recent CMG stock support will hold into early 2018.
Fundamentally, Chipotle stock is not cheap as it sells at a 67x price-earnings-ratio. This is high both in relative and absolute terms. Consider this, McDonald’s Corporation (NYSE:MCD) stock has risen almost 50% in a year, which arguably is too far too fast. Yet it is still half as expensive as CMG from a price-to-earnings perspective.
And expectations are favorable with regards to price action, meaning Chipotle stock is trading about 15% below the average price target on Wall Street. There’s far more upside than downside room from the current price to the range limits. Almost all experts who cover the stock are cautious with their ratings. This lessens the possibility of surprise downgrades and increases the chances of a few upgrades.
Technically, CMG stock is trading inside a two months range where the floor is $300-a-share. It is now trying to break above $330/$340 per share, which is a zone of contention. Back in July, it failed as support. These usually become forward resistance until the bulls gather enough steam to regain them.
Luckily, in my style of trading using options, I don’t chase upside potential. So it’s less important to me that Chipotle is able to break through the resistance. I do, however, need the stock to hold the recent $300-per-share floor so I can profit in time.
Bottom Line on CMG Stock
The idea is simple, I sell downside risk at a price where I am willing to own the stock and let time do the rest. In this case, I have immediate support at $300-per-share and many more lines below that.
This should play in my favor.
I will need the buffer I create today. Chipotle reports in a week and traders are nervous. The options markets are pricing in a +/- $23 move on earnings week. So I better make that much room for error or more if I want my trade to survive the event. Management will likely update us on the impact that Queso is having on comparable sales.
The Trade: Sell the CMG $250 Dec put for $1.60. Here I have an 85% theoretical chance of winning. But if the price falls below my strike, I will accrue losses below $248.40.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the CMG Dec $250/$245 credit put spread, where I have the same odds of success to yield 10% on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Learn how to generate income from options 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 as @racernic on twitter and stocktwits.
