Yea…after I finish writing this article about CMG options I am definitely going to go to Chipotle and get one of these bad boys.
But before that, we are here to talk business, and specifically the making money business.
Every day there are hundreds of opportunities in the market, some being better than other. We would like to let our customers, clients, and readers understand how to narrow their focus to only the best opportunities which give us the best chances of making money.
Chipotle is a $400+ stock. While there are a lot of opportunities in Chipotle each and every day, we want to make sure CMG options are liquid enough for our money. Let’s see how they stack up.
Chipotle was doing great. Investor were making money hand over fist.
Until all of a sudden, customers were getting ill from eating their yummy food. And the cause was not good. It was found out that Chipotle had cases of E. coli in some of their food.
This causes the stock to lose almost half of its value in about a year and a half. Not good as investors saw years of returns wiped out in only a few months time.
We do not believe this is the end of Chipotle at all. The company has done a better job sourcing their food for their restaurants and 18 months is a very long time for people to not be able to change their opinion of a brand.
We feel there is tremendous opportunity to the long side for Chipolte and if it were up to us (which it is!) we would like to trade Chipotle and specifically CMG options from the long side.
Are CMG Options Liquid Enough?
Let’s not get too ahead of ourselves here folks. We know we like Chipotle from the long side but we need to see if CMG options are liquid enough. If they are not liquid enough we are going to need to walk away and look for opportunity elsewhere. Trading stock for a $400+ product is not realistic.
To see if they are liquid enough, we will need to check the options volume first.
For a $20 stock, 13,086 contracts is a big number. When it comes to Chipotle currently being a $402.58 stock, it is really a big number to the tune of over half a billion dollars of notional value ($526,685,328). These numbers would make up believe CMG options are quite liquid.
What about expirations cycles? Are we stuck with just monthly expirations or can we also trade weekly options?
Bam. With Chipotle being such a high priced stock and having weekly options, we can slide it right to the top of our list during earnings season.
Here is the dealbreaker folks. Are the bid/ask spreads too wide for us? It will be tough to trade a $400 stock with wide bid/ask spreads.
They are too wide to trade individual options. That would mean the following trades for CMG options are off the table:
- Long Call
- Short Call
- Long Put
- Short Put
The reason for this is because:
- We are going to have to put upwards of $5 – $20 over midprice to be able to execute a trade
- Uncovered options will require $8,000 in margin requirements
While Chipotle is very liquid, we cannot and should not be trading uncovered options. However, we can trade all covered options as they allow us to do two things than uncovered options don’t:
- The spread market bid/ask spreads are no more than $0.05 wide
- We get to define our risk and a $5 spread doesn’t require more than $500 in margin costs
Our Favorite CMG Options Trade
We know that CMG options are liquid enough for us to trade. We just need to make sure we are trading spreads as opposed to uncovered options.
Since we feel Chipotle is a nice stock to play for an upside move, we would like to buy a call spread after moves down in the stock. For example:
Chipotle is currently trading for $402.58 and we are going to buy the 400/405 call spread that expires in 34 days. If Chipotle expires over $405, we make $235. We like this trade because we only need the stock to go $2.42 higher from here for us to make $235 bucks.
The Final Word on Chipotle
The stock has been beaten down. It is a high priced stock, but the options are liquid enough where trading spreads and covered options are attractive. And since the price has been beaten down, we prefer to trade Chipotle from the long side. Make it simple. Add Chipotle to your list and only trade spreads from the long side.