Buy Signal Flashes for Chipotle Stock

A low-volatility signal suggests now is the time to buy short-term CMG calls

Aug 8, 2018 at 2:18 PM
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It was another round of negative foodborne illness news for Chipotle Mexican Grill, Inc. (NYSE:CMG) in late July, when upwards of 100 customers reported food poisoning after eating at a Powell, Ohio, Chipotle location. But unlike the string of outbreaks that sent the stock spiraling lower in 2015, CMG has bounced back quickly from its latest bout of bad PR -- and in fact, data suggests that now might be a particularly appealing time for a bullish play on the fast-casual restaurant chain.

In today's session, CMG is fresh off a new 52-week high of $484.90. Meanwhile, the equity's Schaeffer's Volatility Index (SVI) -- a measure of front-month, at-the-money implied volatility (ATM IV) -- currently stands at just 24%. This SVI arrives in the 6th percentile of its annual range, indicating that speculative plays have priced in lower volatility expectations just 6% of the time in the past year.

Chipotle stock's IV levels remain muted beyond the August options series, too. Trade-Alert data shows 30-day ATM IV at 23.8% -- not far from Tuesday's freshly set annual low of 23.6%.

This combination of a high stock price and low IV has had bullish implications for CMG in the past, according to Schaeffer's Senior Quantitative Analyst Rocky White. Since 2008, there has been just one prior occasion where CMG has been trading within 2% of its annual high at the same time its SVI has been in the 20th percentile or lower. Following that prior signal, CMG was up 5% one month later.

Of course, that's a very small sample size -- but there's reason to believe CMG's rally has legs this time around, as well. The stock has been cruising higher since late February along the support of its 20-day, 50-day, and 80-day moving averages, and CMG this week has been accelerating away from its late-June highs in the $475 area.

cmg buy signal 0808

And from a sentiment perspective, continued short-covering support could help fuel Chipotle shares higher. Short interest fell by nearly 17% in the past two reporting periods, but still accounts for 10.6% of the stock's float. At CMG's average daily volume, it would take nearly five days for all of the remaining bearish bets to be covered.

Meanwhile, with 71% "hold" or "sell" ratings from brokerage firms, there's relatively low risk of analyst downgrades -- but plenty of room for possible upgrades. Price-target hikes seem overdue, too, as the average 12-month forecast among analysts stands at just $450.52. In today's trading, CMG is up 1.4% at $483.89, about 8% north of that consensus target.


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