Chipotle (CMG) Braces For a Potential Ackman Assault

Chipotle Mexican Grill, Inc. (CMG) is reportedly nervous that activist investor and CMG shareholder Bill Ackman will start clamoring for change

Oct 28, 2016 at 10:48 AM
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Chipotle Mexican Grill, Inc. (NYSE:CMG) is enlisting the help of investment banks and lawyers to defend itself against potential demands by Bill Ackman, multiple sources have reported. Just last month, the activist investor became the restaurant chain's second-largest investor, taking a sizable stake in the firm.

It's hard to blame Ackman for wanting to see changes at Chipotle. The stock has been absolutely abysmal over the long term, shedding over two-fifths of its value year-over-year, and hitting a three-year low of $362.82 on Wednesday. At last check, however, CMG was up 1.1% at $372.55.

Amid this technical tailspin, bearish options players have been piling on. Over the last two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), CMG's 10-day put/call volume ratio has risen from 0.79 to 1.00 -- with long puts equaling calls. Even more telling of bearish options expectations is the stock's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR). At 2.27, this SOIR indicates near-the-money puts more than double calls in the November series.

It appears this skepticism extends beyond the options arena, too. For instance, 68% of covering analysts rate CMG a "hold" or worse. And while short interest has been declining of late, one-fifth of the stock's float remains dedicated to short interest. At the shares' average daily trading volume, it would take upwards of a week to cover these positions.

Finally, for those looking to place options bets on Chipotle Mexican Grill, Inc. (NYSE:CMG), now is a good time to purchase premium -- particularly on short-term strikes. The stock's Schaeffer's Volatility Index (SVI) of 29% ranks in the bottom quartile of its annual range, suggesting near-term volatility expectations are relatively muted at the moment. What's more, based on CMG's Schaeffer's Volatility Scorecard (SVS) of 79, the shares have tended to make bolder moves than the options market has priced in over the prior year.

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