Forget the side of heartburn Chipotle Mexican Grill (NYSE:CMG) shares are serving to current stock holders. It’s time to order a bullish and well-protected spread combination from the options menu — and enjoy either sizzling gains or a well-positioned meal of CMG stock below the market. Let me explain.
It has been a rough few weeks for CMG stock. Shares are off about 14% with nary a real driver to account for the weak price action. But given Chipotle is still up 57% in 2018, it’s also hardly surprising. Still, persistent bears will be glad to tell you CMG’s current swing lower is something that’s only going to get worse.
One recent write-up at Investor Place essentially warned Chipotle, the original fast fresh restaurant operator, is now and forever going forward, a market has-been. The article went on to also strongly suggest Chipotle is an obvious victim of Amazon’s (NASDAQ:AMZN) push into the convenience food arena with its Amazon Go stores.
In this strategist’s view, that type of bearish “fear-casting” is conjecture at best. For one, food scares and scandals are part of the operating landscape of restaurants, but not a death sentence. Even McDonald’s (NYSE:MCD) moved past its own manufactured pink slime Chicken Nuggets scandal and has had its share of food poisoning outbreaks over the years.
Number two, to suggest Chipotle is the obvious loser to Amazon’s Go markets with its store count of just two — is more than a bit presumptuous. And since the analysis also suggests CMG’s terrific 2018 is now in technical trouble due shares losing the 50-day simple moving average, I don’t mind saying there’s always a line somewhere and it may not be bearish.
CMG Stock Daily Chart
Looking at the daily chart of CMG stock and getting past the 50-DSMA failure and its possible bearish implications, it’s also true shares are oversold and remain in an uptrend. Further and supported by my own bullish linear calculations on the provided price chart, CMG is also testing a channel line for support following a fairly common corrective move of 14%. So, who’s right? The bulls or the bears?
Bottom line, there are never any guarantees with price charts — and no matter how many lines you see as favoring your position. That holds true for my current optimism regarding a CMG stock rebound. I’ll leave it at that. But fortunately there is a way to smartly position with much stronger assurances than you’ll find on the price chart or for that matter, when going long shares.
Chipotle Stock Bullish Strategy
I favor a bullish resolution and reaffirmation of CMG’s uptrend, but I’m also a willing buyer of CMG stock at deeper levels of potential technical support. Therefore, I like gaining long exposure using a limited and reduced-risk combined spread strategy.
With Chipotle shares at $454.52, selling the below-market Nov $400/$390 put spread and purchasing the asymmetrical Nov $500/$530/$550 call butterfly for a debit of up to $1.50 looks attractive.
If we’re right in thinking CMG can reverse higher in the coming days a max payout of $28.50 at $530 on expiration is possible. That lines up technically with a test of this summer’s one-year high.
With earnings in late October and CMG stock being a notoriously volatile trader, the required rally of about 17% to achieve this spread’s max profit is certainly possible. Timing, on the other hand, reduces that likelihood. That being said, unlike a traditional butterfly, if CMG toppled its recent highs in the coming weeks, the wider embedded bull call spread guarantees $8.50 above $550.
Lastly, if the bears make hay the loss for this bull is kept to a scant 0.03% of the exposure associated with a long CMG stock position above $400. That offers a nice margin of safety of nearly 12%. Ultimately, risk is limited to $11.50 or 2.5% of owning shares today. And as more than a couple other key support lines come into play, this looks like a very nice way to go long CMG stock at more opportunistic prices.
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
