Chipotle Mexican Grill, Inc. Stock Is Ripe With Opportunity on This Dip

CMG stock is under fire, but that's an opportunity to profit from it

By Nicolas Chahine, InvestorPlace Contributor
Fade Chipotle Stock As It Rallies Towards $500

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Chipotle Mexican Grill, Inc. (NYSE:CMG) has yet to recover from its headline difficulties. Just yesterday, a new health-related headline broke out and CMG stock fell 4% in minutes. This once Wall Street darling is now a broken thesis of what was a hip restaurant with superior food.

There was a time when Chipotle stock delivered impressive comparable sales percentages and investors flocked to it like bees on honey. But a few years ago, people got seriously sick from their food and not just once. The problem persisted and sporadically resurfaced, so CMG stock fell off the $750-per-share levels to a recent low of $270. Management could have managed the outbreaks better and traders spoke with their bids or lack-there-of.

All along the way, Chipotle stock still had its fans, but I knew it would never recover its shining star status. Yet, I continued trading it from the bullish side on every dip same as I am doing today. I want to profit from what others fear and sell downside risk into support. This way I can generate income through options.

How to Trade CMG Stock

I am not buying CMG stock outright, as I don’t believe in it enough to risk $300-per-share without any room for error. My set up will not even need a rally to profit. all I need is for the price to stay above my risk and I retain maximum gains.

Otherwise, I could end up owning Chipotle stock at a discount.

Fundamentally, the CMG stock’s price-to-earnings is much more reasonable now, but it’s definitely not cheap. It’s still near 60, which is high in relative and absolute terms.

Compare this to say Apple Inc. (NASDAQ:AAPL), which is under 20, or even compare it to other restaurants like Habit Restaurants Inc (NASDAQ:HABT) and its P/E is still 40% higher.

Analysts are mostly in a holding pattern on Chipotle stock, which is understandable. On this dip, there could be a few downgrades, but I bet they continue to wait and see as price hovers below their average price targets. What I would expect is a reset of the upside price expectations. So there is risk going long now, but that’s why there is a reward and that is also why I leave much room for error.

The Bet: Sell the CMG Jan $260 put for $2.10. This is a bullish trade that has an 85% theoretical chance of success. However, I would accrue losses below $257.90.

Selling naked puts carries big risk, especially for a stock as frothy and violent as CMG. For those who want to mitigate it, they can sell a spread instead.

The Alternate Bet: Sell the CMG Jan $265/$260 credit put spread, where I have about the same odds of winning but with much smaller risk. However, the spread would yield 25% if successful.

Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.

Get my newsletter for free here. Nicolas Chahine is the managing director of 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.

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