New Trade – $CMG: Narrowly Avoiding Complete Carnitage

by Dan July 22, 2015 11:22 am • Commentary

Last week when CMG was $654 we placed an bearish leaning trade (read here) targeting a disappointment on their upcoming Q2 results.  We closed the position for a small loss (read here) as we did not like the price action heading into the print, but the insane reversal from the post market lows last night following the results (it traded as low as $622, more than $100 lower from here) has us once again considering the bear case. The stock’s stunning post market reversal had to do with, wait for it, carnitas.  The company’s pork offerings have been hampered by a supply disruption, but that’s about to change in the second half as carnitas are coming back on line!

That’s all fine and good, but this is a burrito company trading at 40x expected 2015 earnings. Earnings that are showing significant deceleration from 35% growth in 2014 to 23% this year.   We were fortunate enough not to be there prior to results, but given the stock’s 20% rally since early July from the 52 week lows, back to the 52 week highs, we think this provides an attractive entry on the short side to fade this move:

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

So here is the trade to fade a move back to $700 over the next week:  

Trade: $CMG ($725) Buy to open July 31st 725/700/675 Put Fly for $6

-Buy to open 1 July 31st 725 put for $11.50

-Sell to open 2 July 31st 700 puts at $3.10 each or $6.20 total

-Buy to open 1 July 31st 675 put for 70 cents

Break-Even on July 31st Expiration:

Profits: gains between 719 and 681 of up to 19, with max gain of 19 at 700

Losses: up to 6 between 675 and 681 & between 719 and 725 with max loss of 6 below 675 and above 725

Rationale:  This is a defined risk way to make a short term near the money bearish bet that looks for CMG to come off these highs an consolidate back at the 700 level. It accounts for continued vol compression in the coming days vs. a straight put spread.