Chipotle Mexican Grill, Inc. (NYSE:CMG) still has its share of doubters on Wall Street. But an analyst revision is making Chipotle stock look tastier off and on the price chart and ripe for a bullish order from the options menu in front of next week’s earnings event.
Let me explain.
By some measures, it’s been a good year for Chipotle stock. Shares are up nearly 12.50% and more than 15x the minuscule 0.80% increase this year in the S&P 500. That of course fails to appreciate the past couple years and is a stark contrast to 2018’s shifting fortunes for a bull just coming of age in CMG versus one looking ready for slaughter.
Helping Chipotle along with 2018’s strong performance, Tuesday saw RBC Capital Markets raise its price target on CMG shares from a below-market $310 to a mostly at-the-money $340. Bulls and bears reacted by sending Chipotle stock up 2.45% to $334.61.
Behind the ‘mild’ price revision, the firm sees the recently tapped Chipotle CEO as a driver for more aggressive marketing, innovation and long-term earnings growth.
In truth, the note comes across on the bland side to this strategist. But with no mention of popular bearish talking points such as weak online customer reviews, ‘sour sides’ like avocado price wars or unsatisfying queso sauce and Chipotle stock maintaining an overwhelmingly bearish Street community; CMG is ready for contrarians to place a bullish order from the CMG options menu.
Chipotle Stock Daily Chart
After more than a couple false starts, shares of CMG look ready to move higher and begin a new and more appetizing price cycle for investors. Bottom-line or squiggly lines in this case, Tuesday’s bullish daily special in Chipotle stock has the technical backing of a fairly drawn out and supportive bottoming pattern.
The price formation is known as an inverse triangle or broadening pattern and has loosely taken shape around Chipotle’s 62% retracement level stemming from its all-time-low in 2008 to CMG’s all-time-high in 2015. Overall, the base building in CMG over the last several months is viewed as constructive, albeit a volatile and stomach-churning affair at times as well.
Now and with shares of CMG moving firmly above the 200-day simple moving average for a second time in 2018 and removed from potential angular pattern resistance near $365; the time looks right to nibble on Chipotle stock in front of next week’s earnings and a catalyst for a fresh higher-high pattern and an emerging bull market.
Chipotle Stock Bullish Strategy
For like-minded bullish traders wanting to position through next week’s earnings event with a short-term play, approaching Chipotle stock with an out-of-the-money bull call spread makes sense. Verticals like this go a long ways towards minimizing and containing risk in the event we’re wrong.
The downside for this CMG strategy is both the timing and direction needed to cooperate or the debit risks being lost in full. If readers are comfortable with this possibility, one favored combination is the April 27 $352.50 / $365 call spread. With shares at $334.61, the spread is priced for $3.10 or less than 1% of the risk associated with holding CMG stock.
The minimal exposure is a nice benefit as Chipotle stock does have a history of making large earnings-driven price moves. Thus, if we’re ‘long and wrong’, at least the risk is well-controlled versus owning shares or some other costlier options position. This type of spread is also easy to adjust or even take quick profits if there’s a bit of pre-earnings support in CMG stock.
Technically, this spread was chosen as it fits in well with our expectations. If new highs are in store for Chipotle, buying the $350 call is a well-placed bet to take advantage of that happening. At the same time, since we anticipate some resistance around $365 in the near-term, selling the higher strike and reducing the cost of the long call is not only reasonable, it’s smart business. And as the net transaction can capture as much as $9.40 or 300% if Chipotle stock manages to top our expectations and sizzle through $365; that’s a tasty spread, even if we leave something on the table.
Disclosure: 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.
