As Chipotle Mexican Grill, Inc. (CMG) has faded from the spotlight, so too has the bears’ advantage.
It was bound to happen at some point. All episodes of bad fortune eventually end. Once enough pain has been inflicted and a company’s stock price has fallen to a low enough level to adequately price in whatever is ailing it at the time, the bears depart. Such is the case now with Chipotle stock.
With CMG having fallen from $758 to $399, a harrowing 47% haircut, it’s fair to say a great deal of the recent food drama — and its earnings-killing potential — has been priced into the stock (baked into the burrito?).
Chipotle stock lovers have no doubt noticed its recent strides. Since carving out a low at $399, CMG rallied back to $525 amid a respectable 32% rally.
What’s more, a number of technical resistance barriers have been shattered in the process, signaling a trend change is afoot.
Chipotle’s bottoming process has taken on the form of an ascending triangle, complete with higher pivot lows revealing the increased aggressiveness of bargain hunters. The early February breakout from the triangle pattern also jettisoned the stock back above the oft-watched 50-day moving average for the first time since sickness struck Chipotle stock last October.
While I wouldn’t rule out a pullback in the coming days (CMG is overbought), dips should be viewed as buying opportunities at this stage in the game.
A Cheap Chipotle Stock With Spicy Potential
Many a trader balks upon discovering Chipotle’s lofty price tag (the stock, not the burrito). At $525, it seems to price many a small fry out of the trading arena. For example, 100 shares of CMG comes in at a cool 50 grand these days.
Fortunately, CMG offers stock options aplenty with decent liquidity, so building a cheap trade is a cinch.
If you’re looking to score on strength out of Chipotle stock in the months ahead, consider buying a June $520/$540 call spread for $9.90 or better. The trade consists of buying to open the June $520 call while selling to open the June $540 call.
The max loss is limited to the initial $9.90 debit and will be forfeited if CMG sits below $520 at June expiration. The max gain is limited to the distance between strikes minus the net debit, or $10.10, and will be captured if CMG can rise above $540 by expiration.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
