Chipotle Mexican Grill (CMG) shares are getting wrecked after its CEO Brian Niccol left to try and turn around Starbucks. CEO transitions are often knee-jerk reactions so it's setting up a possible profitable move for options traders. Take a step back on Chipotle.
It consistently impresses by exceeding earnings estimates quarter after quarter. The last four quarters have all been beats, and the company raised its forward guidance in the most recent earnings report. With a positive outlook on CMG, I see this pre-market drop as an opportunity to invest in a company that seems almost recession-proof.
Beyond the fundamentals, let's consider the technical side as well. Below is a one-year daily chart of CMG: The 200-day simple moving average (SMA) is widely regarded by market technicians as a support area. We are seeing signs of mean reversion around this level, with recent price action showing higher highs and higher lows.
The Relative Strength Index (RSI) is also emerging from the oversold region, further confirming an uptrend. The only caveat is that markets sometimes operate on emotions, so it's important to monitor how price action unfolds an hour after the market opens before committing to a bullish trade. The trade To initiate a bullish position on CMG, I plan to use a strategy known as a "bull call spread.
" This involves purchasing an at-the-money (ATM) call option and simultaneously selling an out-of-the-money (OTM) call option as part of the same trade. Chipotle is quite the volatile stock on Tuesday. This trade was written assuming Chipotle was trading around $51 a share.
Adjust your prices accordingly based on the latest movement. Buying $51 call, September 6 th expiry Selling $52 call, September 6 th expiry Cost: $50 potential profit: $50 Strikes will depend on CMG's price at the time one is looking to enter the trade. The long call should be in- the-money, and the short call should be out of the money, thereby allowing one to construct an at-the-money bull call spread.
It is best to give these trades 24-35 days to play out in your favor, especially when dealing with knee jerk reactions like this. If CMG trades at or above the short strike by the expiration date, this trade could yield a return of 100% on the amount risked. With 50 contracts, this equates to risking $2500 to potentially gain $2500.
DISCLOSURES: : I will be placing a similar trade in account today. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY .
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