Options Traders Expect Big Earnings Swing for Chipotle Stock

Short interest on CMG is at its highest level since mid-January

Oct 23, 2017 at 1:18 PM
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Third-quarter earnings reports continue to dominate the headlines this week. Tomorrow, traders will digest results from burrito chain Chipotle Mexican Grill, Inc. (NYSE:CMG) after the close. Here's a closer look at CMG stock ahead of earnings, and how options traders have been positioning themselves on the restaurant's shares.

Earnings History Isn't On CMG's Side

Chipotle Mexican Grill stock has been on the decline since its May highs, down 14.5% year-to-date. The shares hit a four-year low of $295.11 on Sept. 19, and have spent the past few weeks struggling under the $320-$330 range. At last check, CMG was 0.5% lower at $323. What's more, Chipotle stock could be vulnerable for another slide after tomorrow's earnings report, if past is precedent.

Historically, CMG shares have moved lower the day after six of the company's last eight reports, with an average post-earnings move of 4.9%, regardless of the direction. After earnings in July, the stock dropped 2.3% in one day. This time around, the options market is pricing in a bigger-than-usual one-day swing of 9.5%, per at-the-money implied volatility data. A drop of this nature would send the security back below its September lows.

Skepticism Mounts Ahead of Earnings

In the options pits today, traders are targeting puts over calls, with the weekly 10/27 300- and 280-strike puts ranking as the top two most active options. Meanwhile, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.07 is higher than two-thirds of all other readings from the past year, indicating near-term traders are more put-biased than usual right now.

Short sellers appear to be betting on another post-earnings drop for the food stock, too. Short interest on CMG has grown 3.1% during the last two reporting periods, to 4.95 million shorted shares -- the highest level since mid-January.

Analysts have also been rather bearish toward CMG ahead of its earnings report. Just last Wednesday, BofA-Merrill Lynch downgraded the food stock to "underperform" from "neutral," and slashed its price target to $285 from $390, citing overly optimistic earnings-per-share (EPS) estimates for 2018 and 2019. The following day, two more brokerage firms cut their price targets on CMG, though there could be room for more. The stock's average 12-month price target of $354.42 represents expected upside of about 10% from the equity's current perch.

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