Chipotle Stock Downgrade Could Be a Buying Opportunity

Chipotle options are attractively priced at the moment

Managing Editor
Jul 10, 2018 at 9:46 AM
facebook twitter linkedin


Chipotle Mexican Grill, Inc. (NYSE:CMG) stock is 1.9% lower to trade at $455.10 this morning, after Mizuho downgraded the restaurant name to "underperform" from "neutral," while boosting its price target to $330 from $300. The analyst in coverage believes the company's aggressive recovery is already priced in, but also gave a stamp of approval for new CEO Brian Niccol. Despite the bearish analyst attention, history suggests CMG's pullback today may be short-lived.

Although Chipotle's investor conference call last month left much to be desired, the security has had an impressive recovery in 2018, adding almost 60% and hitting an annual high of $474.40 on June 22. Even with the pullback today, CMG shares are still trading above their 50-day moving average, a trendline that's been supportive since mid-February. 

What's more, Chipotle stock's Schaeffer's Volatility Index (SVI) is docked at 25% -- in the 8th annual percentile, meaning premium on short-term options contracts is relatively cheap at the moment, from a volatility perspective. According to Schaeffer's Senior Quantitative Analyst Rocky White, the one other time since 2008 where CMG was trading near 52-week highs with its SVI ranked in the 20th annual percentile or lower, the stock rallied 6.8% over the next month.

In addition, the stock's Schaeffer's Volatility Scorecard (SVS) currently sits at a 94 out of 100. This lofty ranking suggests that CMG has handily exceeded the volatility expectations priced into its options during the past 12 months.

Short sellers have started to hit the bricks in the meantime. Short interest fell by 17% in the two most recent reporting periods, yet the 3.13 million shares sold short still represents almost 13% of CMG's total available float and more than four days of pent-up buying power. Should CMG start climbing again in the next month, a short squeeze is definitely in play.

Winning With Weekly Options

1606854690

  


 
Special Offers from Schaeffer's Trading Partners