As we round up an interesting week of evaluating our stock options trading portfolio, I am scaling out of one of my favorite profitable options trade in recent times. Two months ago on May 21, I wrote about trading Chipotle Mexican Grill, Inc. (NYSE:CMG) options in a post titled: “At $500, Chipotle Mexican Grill Still Has Upside Potential.”
When I wrote that post, shares of Chipotle were trading at $504.18 per share and I recommended in-the-money option CMG Jan 2015 500.000 call (CMG150117C00500000), which was trading at $50.23 per contract. The reason behind my bullishness on Chipotle is that the company will continue to grow inasmuch as it doesn’t deviate from its target of opening 3,000 restaurants. More so, an RSI of 45.72 encouraged my aggressive bull call because the buying action was still in the early stages.
From a share price of $504.18 in May, Chipotle touched a relative high of $604.94 last week on Monday. As at 11:59AM EDT today, the stock has surged 16.57% from its May trading price and the call option I recommended has jumped by 133.9% to $117.50.
How to Trade CMG Options Now
I recommend scaling out of your position on the CMG Jan 2015 500.000 call to clear profits off the table as we await the release of second quarter results next week on Monday. I think selling to close 70% of your position is a smart move and the remaining 30% will offer you an opportunity to benefit from any upside potential that shows up in Chipotle.
Am I Giving Up on Chipotle?
My recommendation to scale out of profits comes from a deep understanding of the difference between a trader and an investor mindset. As a trader, I bought CMG options for profits and not for ownership (you should have bought ownership 4 to 8 years ago) in the stock and I certainly won’t be buying for ownership now that the stock is close to $600 per share.
Chipotle is a fundamentally sound company and it has upside potential inasmuch as it continues to increase the number of its restaurants and the volume sales at individual restaurants. The RSI index has been instrumental to my success in trading CMG calls and as the stock chart below shows, Chipotle’s share price ran into turbulent waters when the RSI index crossed the overbought levels.
You will notice that the stock started a 1 step forward, 2 steps backward dance since it crossed the overbought levels and the trading down has been consistent in four of the last five sessions.
How to Trade CMG Options Going Forward
Chipotle Mexican Grill has been a target of analysts’ revisions in the last one week. On Monday, analysts at Raymond James raised their price target on the company from $625.00 to $675.00. On Tuesday, analysts at Barclays raised their price objective on Chipotle to $600.00 from $580.00. Chipotle has a history of significant drops in share price when earnings do not outperform estimates; hence, I will wait to see how the stock performs after second quarter earnings before initiating new options trading positions.
— Daily Option Alerts