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02/11/20
  • CMG rallied yesterday, reversing most of last week’s dip
  • Shares fell last week on earnings, call options discounted
  • Numbers appeared to be strong, many analysts upped targets

It was the best of times, it was the worst of times—all in one trading session.

Fast-food chain Chipotle (CMG), which has rallied around 250% over the past two years, tagged a new record high of $893.02 last Wednesday (February 5)—the same day it closed 3.5% lower in the wake of its Q4 earnings:

Chart 1: Chipotle (CMG), 12/13/19–2/10/20. Chipotle (CMG) price chart. Rebound from earnings dip.

Source: Power E*TRADE


It was another one of those seemingly head-scratching events, as the company topped earnings, matched revenues, and saw a few Street players up their price targets for the stock—including Goldman Sachs, which raised its level to $1,050 (the stock closed at $854.01 last Wednesday).1

The company also appeared to get a vote of confidence from hedge fund heavyweight Bill Ackman (Pershing Square), who reportedly notified clients he was holding on to CMG, citing his belief that management had a clear plan for continued progress this year (the stock was his company’s biggest winner last year).2

Are other traders and investors starting to feel CMG hunger pangs? After drifting lower in early trading last Thursday (February 6), CMG shares have now bounced back for three straight days, including yesterday’s 2%-plus intraday rally that, halfway through the day, had pushed prices to within 4.75% of their record peak.

With CMG’s implied volatility (IV) down in the aftermath of earnings (a LiveAction scan yesterday showed IV was roughly 36% lower than a week earlier), options traders expecting CMG to challenge its highs may now be more inclined to buy CMG calls, since lower IV often translates into cheaper options prices. The following chart, for example, shows the recent price action in the March $885 calls, which were up roughly 37% yesterday (trading around $23.70) when CMG stock was up around 2%

Chart 2: Chipotle (CMG) March $885 call option, 1/27/19–2/10/20. CMG call option price chart. Magnifying the moves.

Source: Power E*TRADE


In the event the stock rallied to new highs in the near term, many traders would look for the $885 call to make a parallel move to challenge its April 4–5 highs, in which case the option could gain more than 68% (on a move from $23.70 to $40, for example). Of course, those traders would also be aware that the additional leverage provided by options is a double-edged sword, as evidenced by the $885 call’s 64% drop on February 5. On the other hand, a call buyer’s loss is always limited to the amount paid for the option.

Finally, because options begin to lose value at an accelerated rate in the final two or three weeks before expiration (March options expire a little more than five weeks from now), traders anticipating a delayed move (or a longer-term one) would likely consider looking at options with a little more shelf life.

Today’s numbers (all times ET): NFIB Business Optimism Index (6 a.m.), JOLTS (10 a.m.), Fed Chairman Jerome Powell testifies before congress (10 a.m.).

Today’s earnings include: Under Armour (UAA), Charles River Laboratories (CRL), Exact Sciences (EXAS), Lattice Semiconductor (LSCC), Exelon (EXC), US Foods (USFD), LYFT (LYFT), Martin Marietta (MLM).

 

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1 StreetInsider.com. Chipotle Mexican Grill (CMG) PT Raised to $1,050 at Goldman as Menu Additions Support Top Industry Metrics. 2/5/20.

2 Reuters. Ackman's Pershing Square exits Starbucks, sticks by Chipotle, sees gains at Agilent. 2/5/20.

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