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Option Traders Weigh In on Chipotle Mexican Grill

CMG investors are selling weekly calls and puts

by 10/2/2012 1:47 PM
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Short-term options traders are targeting Chipotle Mexican Grill, Inc. (NYSE:CMG - 304.21) today, with weekly calls and puts heating up on the restaurateur. At last check, CMG has seen around 15,000 calls and 18,000 puts change hands, far surpassing its average intraday volume of about 6,000 calls and 5,100 puts.

On the call side, investors have honed in on the out-of-the-money weekly 310 strike, which has seen more than 1,200 contracts cross the tape. With open interest of fewer than 40 contracts at the strike, and considering nearly two-thirds of the calls have traded at the bid price, it's safe to assume many investors are selling the calls to open. By writing the calls, the sellers are expecting CMG to remain south of $310 through the end of the week. In this best-case scenario, the calls will remain out of the money, and the traders can retain the entire net credit received at initiation.

On the flip side, investors appear to be selling to open the weekly 285-strike put, which has seen more than 1,500 contracts traded on open interest of just 21 contracts. Again, about 66% of the puts have crossed at the bid price, hinting at seller-driven volume. By writing the puts to open, the sellers are expecting CMG to remain atop the $285 level through Friday's close. Should the puts expire worthless, the sellers can pocket the initial premium received from the sale.

Broadening our sentiment scope, we find that options traders have grown increasingly optimistic toward CMG. The stock's 10-day call/put volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at 1.02 -- in the 81st percentile of its annual range. Or, in simpler terms, option buyers have initiated bullish bets over bearish at a faster-than-usual pace during the past couple of weeks.

Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) currently rests at 1.09 -- higher than just 21% of all other readings of the past year. In other words, near-term options traders are more call-skewed than usual right now.

However, not everyone on Wall Street is optimistically aligned toward CMG. The stock currently boasts just five "buy" or better ratings from analysts, compared to 15 tepid "holds" and two "sell" or worse suggestions.

Plus, the shares are under pressure today, after hedge fund manager David Einhorn recommended shorting the stock, citing increasing competition from "a resurgent Taco Bell." In response, Chipotle spokesman Chris Arnold said, "We don't see a challenge to our business at all. We have a different customer base and very loyal customers. What's more, the food we serve is very different than Taco Bell."

Nevertheless, CMG fell as low as $290.15 in early trading, but has since trimmed its deficit to 3.8%.

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