The restaurant sector remains squeamish as the action in Chipotle stock (CMG) has been astonishing and could get worse.
Brand images can be fragile, and terrible news or tragic events can have big impact on stocks. Chipotle has always maintained a high level of freshness, quality, and likeness in the court of public opinion but the recent E. coli cases linked to its restaurants have shares in a free fall.
Wall Street analysts have slashed their price targets on Chipotle stock in recent weeks. A report that more E. coli cases are linked to its restaurants sent shares tumbling another 12% Friday. The stock opened at $612 and was holding $600 before a sudden drop below this level shortly after 2 p.m. (EST).
The chart below shows the plunge to fresh 52-week lows.
Initial support at $580 tried to hold, followed by $560 before a continued selloff into the closing bell. Timing an option trade when the baby is getting thrown out with the bath water is tricky but I was watching CMG options with peaked interest.
Speculative traders could initiate positions in the CMG December 550 puts (CMG151218P00550000) at current levels.
The put options opened at $2.25 on Friday and zoomed 1,222% on volume north of 500 contracts. The bid/ask prices are often much wider on triple-digit stocks than double-digit stocks and it’s why I tend to shy away on paying more than $2 for an option. However, in this case, I could have bought fewer contracts and still keep a trade below the amount of cash I would commit to an overall trade.
I would expect a possible slight rebound rally this week in Chipotle stock but the multi-year chart shows possible risk to $500-$450. Shares gapped higher and above the $450 level in late 2013 following better-than-expected earnings and momentum throughout the year. From what I have researched, analysts were trimming estimates by a dime for current quarter earnings estimates.
With the company’s E. coli impact now up to six states, fickle investors are getting nervous. Chipotle stock is down significantly from the all-time high of $758, and value investors seem hesitant to show their own support.
I will likely stay on the sidelines until the market decides when shares are a bargain buy. This is when I might start looking at possible bullish trades for Chipotle in 2016. In the meantime, keep the CMG December 500 puts (CMG151218P00500000) on your Watch List in case they become cheaper this week and resistance holds. Aggressive traders can target these put options on a move in CMG below $525.
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