I’ll Pass on the Chipotle Sauce (CMG)

by Dan April 19, 2012 3:30 pm • Commentary

CMG reports Q1 after the close and the options market is implying about a 5.5% move which is a bit rich to the 4 qtr avg move of about 3.8%

The stock has obviously been a massive performer ytd up 27% and as you guys know I don’t buy stocks at all time highs and I certainly don’t buy stocks that trade at 50+ times estimated earnings that are only growing 30% and likely to decelerate.

Not too many trades that look attractive here as the vol is not cheap and put spreads are not dollar cheap unless you get too far out of the money.


CMG volatility is interesting because of the recent divergence between actual volatility in the stock and what the options market continues to price as expected moves through the implied vol.

First, let’s see where things stand going into earnings:

CMG monthly skew from LiveVol Pro

April Vol is jacked as one would expect with only one day left until expiration and earnings out tonight. Front month is about 100 vol while the back months are in the low 30’s.

What’s a little more interesting is all of this premium in relation to what the stock has been doing the past 6 months or so. Here’s the IV vs HV chart for the past 2 years. You’ll see that actual vol in the stock just collapsed during 2012 as the stock marched slowly higher with very small intra-day ranges. This is the type of scenario where even if you got direction right with the options by buying upside calls you probably still lost money. Impled vol has come down to historical lows but is still way higher than what the stock is showing through its daily moves:

CMG IV vs HV 2 year from LiveVol Pro

MY VIEW: I don’t have strong conviction one way or the other, but given the fact that momentum names and high fliers appear to be breaking, this is an obvious candidate to join the club.   This is not a stock I would be naked short given it’s 7% short interest and its domestically focused business.

I think all vol in this name is a little too high, if you wanted to get some short exposure without laying out a ton of premium, you can take advantage the elevated front month vol by selling April and maybe buying slightly less over-priced May. May options will probably come in about 25% following earnings. But that’s why I’m not doing this trade. I just don’t feel strongly enough to be stuck with vol in May that I think is overpriced.