Chipotle Mexican Grill, Inc.’s Rally Has Reached Extemes

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Chipotle stock - Chipotle Mexican Grill, Inc.’s Rally Has Reached Extemes

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Shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) have certainly been on a post-earnings tear.

Chipotle stock has added some 87 points, or 25%, since reporting earnings last Wednesday. While a move higher was undoubtedly warranted, the massive move higher has reached an extreme-both on a fundamental and technical basis. I look for CMG to retrace some of the recent rally over the coming weeks.

Chipotle reported earnings on April 25, which sent the stock into orbit. Earnings blew past expectations, coming in at $2.13 per shares compared to consensus of $1.60 per share. Revenues were $1.15 billion, which were only in-line with analyst expectations. It always gives me pause when a stock rallies 25% even though actual sales were nothing special.

More importantly, the P/E ratio-even after the big earnings beat-now stands at a very rich 63.8. It is also the highest P/E ratio since 2016 and more than triple the S&P 500. Chipotle stock is definitely getting a little pricey at current levels.

From a technical perspective, Chipotle stock is trading right at major long-term resistance at $433. CMG traded up to that price Friday before reversing to close well off the highs.

This type of reversal pattern is many times a sign of a short-term top in the stock, especially following such a massive rally. MACD is also flashing a warning with a reading approaching 10, by far the most exuberant level of the past year.

Previous instances when MACD reached extremes proved to a reliable indication of a top in the past.

CMG options are trading at the 35th percentile of implied volatility (IV), meaning option prices are comparatively cheap.

Historic volatility, or how much the stock is actually moving, is trading at the 100th percentile, which means shares are the most volatile they have been in the past year.

This makes option prices incredibly cheap given how much the stock has been moving. It also favors long volatility strategies when structuring trades.

So to position for a pullback in Chipotle stock, a put diagonal spread makes sense.

Chipotle Stock Options

Buy CMG June $410 put and sell CMG May $400 put for a $7.50 net debit.

The trade is net short 15 deltas at inception, which is equivalent to being short 15 shares of CMG. Maximum risk on the trade is $750 per spread. Ideally Chipotle stock pulls back towards the $400 level at May expiration to achieve the maximum gain.

Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/the-rally-in-chipotle-stock-has-reached-an-exteme/.

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