New Trade – $CMG: A Slide of Guac?

by Dan July 13, 2015 10:52 am • Commentary

A week ago, following Barron’s negative article on Chipolte (CMG), we took a look at the stock (below) and agreed with the fundamental take, but concluded:

it kind of feels like a press on the short side and makes sense to wait for a bounce if you agree with Barron’s and think that Q2 earnings will be the catalyst.

The stock has bounced, off of key technical support at $600, and has touched its 200 day moving average for the first time since gapping through it the downside following their disappointing earnings in April. This could serve as near term technical resistance:

CMG 1yr chart from Bloomberg
CMG 1yr chart from Bloomberg

Given the fact that CMG has gapped lower by 7% the last three earnings reports, the implied move of only 7% between now and next Friday looks cheap.  Obviously picking a direction makes it a lot cheaper, but as regular readers know, long premium directional trades into earnings events are tricky, as you need to get a lot of things right, first and foremost direction, timing and magnitude of the move.  But, we are in a market environment where bad news is being punished and good news only modestly rewarded, if you thought, as I kind of do that the recent bounce in CMG could incorporate a bit of good news, and a miss and guide lower would cause a re-test of $600, then put spreads look very attractive.

Here is the trade to play for a move back to $600:

Trade: CMG ($654) Buy July 24th weekly 650/600/550 Put Fly for $10

-Buy to Open 1 July 24th 650 Put for 21.50

-Sell to Open 2 July 24th weekly 600 Put at 6.25 or 13 total

-Buy to Open 1 July 24th weekly 550 put for 1.50

Break-Even on July 24th weekly Expiration:

Profits:  up to 40 between 640 and 560 with max gain of 40 at 600

Losses: up to between 640 & 650 and between 560 & 550 with max loss of 10 below 550 and above 650

Rationale:  Risking 1.5% of the underlying stock price to possibly make 6% if the stock were to decline in line with the implied move post earnings, I like those odds, and I certainly would not be a buyer of the stock here.




Name That Trade – $CMG: Burrito Loco

Over the weekend Barron’s painted a fairly downbeat picture for Chipotle’s (CMG) prospects in the coming year as growth decelerates, suggesting that “the stock could lose another 15% to 20%” in their feature article Chipotle Losing Its Spice.  The piece sites increasing competition from some now well funded recent ipos (SHAK) in the quick serve space, rising food costs and of course valuation.

To be honest I don’t see anything new here, despite this being a stock that I have not been a fan of for a while (and been wrong).  A few things that stick out to me now are generally related to the stock’s reaction to news and waning momentum. Most notably the stock’s 17% decline from the all time highs made in January, the two consecutive 7% gaps lower on massive volume following disappointing earnings in February and April and the stock now sitting important one year technical support:

CMG 1yr chart from Bloomberg

I would also add that the stock recently broke the uptrend that has been in place since late 2012, with little technical support to $500:

CMG 3yr chart from Bloomberg

During the stock’s bull run from late 2012 to its highs earlier this year it gained more than 200%, and for the most part disregarded any bad news.  Well that has apparently changed.

The next identifiable catalyst is earnings, confirmed for July 21st after the close. The options market is implying about a 7.5% move between now and Friday July 24th.  If you thought the stock could have another 7% move, then picking a direction is even cheaper than buying the move. Short dated options prices are elevated despite the stock’s lack of recent movement, with 30 day at the money implied vol at 35%:

CMG 1yr chart of 30 day at the money IV from Bloomberg

A bounce back to the late June high near $625 could provide a short entry prior to earnings, but it is also important to note that in 2013 and 2014 the stock had 4 post earnings moves of greater than 10%, so it likely makes sense to define risk, despite elevated options premiums:

From Bloomberg

Gun to my head right here with stock $605 I’d prob buy the July 24th 600/550 put spread for $15 to play for a break of $600, but it kind of feels like a press on the short side and makes sense to wait for a bounce if you agree with Barron’s and think that Q2 earnings will be the catalyst.