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Put Credit Spread on Chipotle Mexican Grill Inc. (CMG)

CMG had a rough 2012, but still appears to be fundamentally strong


As we move closer to Christmas, trading volume will surely start to decrease but that doesn’t mean there aren’t trade opportunities out there. Here is a short credit spread trade idea on a stock that looks like it has halted its decline just in time for the New Year.

 Chipotle Mexican Grill Inc. (NYSE:CMG) Put Credit Spread

The trade:  Sell Dec. 28 275/280 Put Credit Spread (selling the Dec. 28 280 put and buying the Dec. 28 275 put) for 50 cents or better.

The strategy: The maximum potential profit for this trade is $0.50 if CMG is trading above $280 at Dec. 28 expiration. The maximum loss is $4.50 ($5 minus 50 cents) if CMG is trading below $275 at Dec. 28 expiration.  Breakeven is $279.50 at expiration based on a 50-cent credit.

 The rationale: CMG certainly has had a rough 2012. The stock has fallen dramatically the last couple of earnings announcements. The company reported a weaker sales outlook for next year than was previously anticipated but profit increased last quarter roughly 20% with sales increasing 18%. Even though the outlook has changed the company still appears to be fundamentally strong.

Technically the stock just broke through a resistance area around $280 which it hasn’t been able to do in two months. CMG than ran into some more resistance around $297 and has pulled back giving option traders an opportunity to sell premium. If the stock decreases, prior resistance should now become support at $280. This should keep the stock from moving through that level through the Christmas week barring any unexpected news.

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