It has been a sizzling 2018 for Chipotle Mexican Grill (NYSE:CMG) and its shareholders. Yet with CMG stock at increased risk of a larger pullback on the price chart and the difficulties of market timing ever present, ordering a modified butterfly from the Chipotle’s options menu makes sense. Let me explain.
What a year it has been for CMG stock investors. Under new leadership and in the wake of a trail of well-publicized and criticized health scandals, shares are up roughly 70% in 2018. Despite the rally, though, the prior couple years’ impact on CMG is still being felt by most shareholders. The fact is Chipotle remains nearly 35% below its all-time high of around $758 set three years ago .
The other fact is not everyone believes Chipotle has cleaned up its act and will be able to move fully past its problems off and on the price chart. CMG stock maintains fairly high bearish short interest of around 10%. And Monday a mixed analyst community saw investment firm Wedbush issue a bearish note helping pressure Chipotle shares by about 4.5% on the session.
Analyst Nick Setyan cut CMG stock from “neutral” to “underperform” and trimmed his price target from $450 to $445 citing concern over same-store-sales in the short-term and Chipotle facing continued margin pressures longer-term.
As well, Wedbush expressed its opinion that recent sales gains will stall as price increases and an improved mix are “set to decline as contributors” and counter benefits from the CMG’s digital and marketing efforts.
Toss in a side of concern that Chipotle’s food-safety problems aren’t fully behind it — and Monday’s bout of queasiness wasn’t entirely a surprise and isn’t likely over either.
Looking at the weekly chart of CMG stock, 2018’s rally has left its mark on shares in the form of an uptrend, but one at risk of some corrective backing and filling. Shares have hit an area of resistance backed by the 50% and 62% retracement levels and upper Bollinger Band.
The weekly stochastics set-up is also warning bulls CMG is prone to further profit-taking. The secondary indicator has been diverging negatively for nearly two months and is now forming a bearish crossover. Bottom line, I’m bullish longer-term, but anticipate patient investors will be offered a support-style entry point as shares correct in the near future.
Chipotle Stock Bullish Strategy
For like-minded bullish traders who appreciate the increased possibility of profit-taking, but also know momentum can leave those waiting for a better price permanently side-lined, a modified bullish butterfly position might be considered. One favored combination with shares near $495 is buying the Oct $515/$540/$555 call butterfly for up to $5.
For roughly 1% of the risk tied to owning CMG stock, this position effectively minimizes a trader’s downside exposure. This type of ironclad insurance means investors wanting to buy Chipotle during a larger corrective move in shares, would be in fairly good shape financially and mentally to do just that compared to a bull buying CMG today.
If we’re wrong about price pressure in the near-term and 2018’s bullish price momentum prevails over the next couple of months, this position offers decent long delta exposure. Ultimately, this butterfly can capture up to $20, or a 400% return, if CMG stock is able to rally by 9% and finish at $540 on expiration.
Lastly and unlike a symmetrical butterfly positioned which runs the risk of a profit turning into a loss if shares rally too aggressively, this bull is guaranteed $10 or 200% above $555. Now that’s a combination on the Chipotle options menu worth ordering!
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.
