How I traded earnings on Chipotle Mexican Grill

The following is a trade review from our Stockguy 22 Bull/Bear Report, a weekly newsletter that is filled with great trade ideas from several traders.

I had suggested a few different types of earnings trades on CMG last week and as a whole they performed pretty well for us. CMG did indeed continue its bullish reversal as I had hoped, and had an explosive move higher after its report. As we look at a 5 minute chart of Friday’s action, we can see that CMG was strong throughout the day and rallied to close over 11% higher buy the end of the day.

I took all three of the suggested plays as they were compatible and worked well together providing us with a decent total profit on the whole. Lets look at each play separately;

a) vol pump straddle – because the current options are pricing in a 7% move and CMG has shown the ability to fluctuate wildly after its reports, I would expect the I.V. on this name to possibly appreciate into Thursday. One way to play this would be to buy a straddle on Monday and hold it until just prior to Thursday’s close. The spreads are a little wide, but the current straddle is selling for around $25, and may be worth purchasing for this type of trade on a good fill.

I bought the straddle for $25 on Monday though it could have been had for around $24 for the more patient trader. It was closed for $27.50 later in the week for a nice gain of 10%.

b) bullish otm play – while its too early to really pick a specific trade for this, I will be looking for some sort of bullish play with either an out of the money calendar or call vertical on this name if the action leading to the earnings report stays strong.

I placed a call calendar trade centered around the $345 strike for 1.10 per contract. This ultimately proved to be too conservative of a target as CMG blew past it on its way to the mid $360’s. However, we opened right at my level and I scaled out of half of them for a 150% profit in the morning. I was hoping for a pull back as we headed into the afternoon to close out the remaining position, but once I saw the expanding volatility/break of the bull flag circled on the chart, I abandoned the rest of the position for a small loss (-.10 per contract). A better move would have been to close out the sold calls and hold on to the calls from next week as CMG ran higher, (one of the advantages of trading calendar spreads is this type of versatility) but I just closed out the trade as a whole to stick to the plan I had outlined in the newsletter.

c) support butterfly – for those bearish the name, or those looking to hedge, I expect a poor report to lead to a move down to somewhere around or slightly below the previous breakout area of $312-$315. An excellent way to play this type of play would be to place a butterfly trade centered around either the $315 or $310 strike. Again, the strikes are a bit wide on this and the value of this play depends on the fill, it is a reasonable way to profit if CMG stalls around this area. Depending on the fill, I may even combine this play with the bullish play from above.

I was able to put this play on for .45 per contract and while it was a total loss, its purpose was to act as a hedge for the bullish play in case CMG disappointed during its report.

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Posted in Blog, Charting & Analysis, Charts, Commentary, Earnings, General Trading, Newsletter, Stocks