Another health scare in Chipotle Mexican Grill, Inc. (NYSE:CMG) is likely testing the intestinal fortitude of some investors. But if you’re bullish on Chipotle’s ability to clean its hands of those problems in 2018, simply order a modified spread off the CMG stock options menu to mop up profits with reduced and limited risk. Let me explain.
It has been a couple of painful years for CMG stock investors, as well as a few customers and employees. As you’re also likely aware, both situations are largely the result of a handful of isolated, but very well-publicized, health-related incidents involving contracted illnesses related to the norovirus.
Chipotle has also been transparent and taken full responsibility since day one back in 2015 while implementing more than a few impressive changes in its operations to guard against more occurrences. Yet and like the ghost from Christmas past, another incident appears to be challenging Chipotle’s safety protocols and testing the resolve of CMG stock bulls.
On Wednesday, Chipotle shares dumped nearly 5% while Thursday saw an additional queasy release of around 2% in CMG stock. The back-to-back declines follow another seemingly random and unwanted episode of employees and customers at a Los Angeles location being hit with symptoms which sound and look a good deal like the past incidents involving the norovirus.
It looks bad of course. But could it also be a case of bad luck for Chipotle? There is a widespread bout of influenza hitting California to consider. As well and in the times we live, there is also the possibility the reports could be “fake news” as the company hinted at on CNBC given the lack of clinical validation thus far.
Personally, I’m still invested in eating at Chipotle on a fairly regular basis, as well as invested on the CMG stock chart too. Some might say that’s some risky business. My rebuttal is the former could be my obscured and optimistic view from the left coast hamlet of Portlandia.
And the latter position? As an investor, this involves my equal optimism tied to the lower right hand corner of the price chart and using CMG stock’s options to contain any potential future ills which might otherwise test my intestinal fortitude.
You don’t have to be an overly technical investor to acknowledge CMG stock has gone from flavor of the month for more than a few years to being declared unfit for consumption among bullish investors over the last couple years.
Personally, I’ve made good and bad forecasts in CMG during the latter and more trying period for Chipotle’s investors. At the same time, profits and losses were made much healthier through the use of defined and reduced-risk options strategies.
Looking forward into 2018 and as noted above, I’m optimistic CMG stock can turn things around. The recent action has been nauseating of course. But with an undercut test and reversal back through the 62% retracement level from CMG’s all-time-low to all-time-high this month, our view is that Chipotle looks good for another nibble.
One strategy that looks attractive is what I call a modified fence. The bullish strategy limits and reduces risk by purchasing a call vertical and selling a put vertical spread in the same contract month to finance the position.
The primary objective is for the call spread to go fully in-the-money. This allows the trader to capture the max profit of the combo. But there’s the added bonus for bullish investors that like to buy on weakness.
If CMG shares fall dramatically below the put spread, the limited loss could set up a nice buying opportunity to purchase Chipotle at a considerably lower price versus a stock trader simply trying to average in over time.
Reviewing Chipotle’s options and with shares at $292.40, one favored modified fence is buying the June $340/$370 call spread packaged with selling the June $275/$265 put spread for a credit of $1 or better. This particular combination enjoys several months of shelf life, offers profit potential of up to $31 and risk of just $9 — or as mentioned, a way to potentially buy shares at a much better price than the regular CMG stock trader.
Investment accounts under Christopher Tyler’s management currently own positions in Chipotle stock (CMG) and/or its derivatives. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.