Chipotle Mexican Grill, Inc. (CMG) Call Buyers Hang Tight as Rumors Fly

Chipotle Mexican Grill, Inc. (NYSE:CMG) is lower today, as fresh food poisoning rumors circulate

by Karee Venema

Published on Jul 7, 2016 at 3:07 PM
Updated on Jul 7, 2016 at 3:07 PM

The hits just keep coming for Chipotle Mexican Grill, Inc. (NYSE:CMG), with rumors of a fresh food poisoning incident in New York echoing the burrito chains highly publicized -- and damaging -- food-borne illness issues late last year. Although Chipotle has since responded, saying there have been no reported illnesses, CMG stock is down 2.6% at $390.76. Nevertheless, call volume is running at an accelerated clip this afternoon, with a number of options traders eyeing a quick rebound for CMG.

Most active is CMG's weekly 7/22 450-strike call, where there appears to be some buy-to-open activity occurring. If this is indeed the case, the goal is for CMG to rally north of $450 -- territory not explored since late May -- by the close on Friday, July 22. Elsewhere, eleventh-hour traders appear to be purchasing new positions at the security's weekly 7/8 400-strike call, betting on a bounce by tomorrow's close.

Widening the sentiment scope reveals options traders have been busy buying to open calls relative to puts in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), CMG's 10-day call/put volume ratio of 1.43 ranks higher than all other comparable readings taken in the past year.

However, there could be an ulterior motive to this recent rush toward long calls. Short interest on CMG jumped 8% in the most recent reporting period, and now accounts for a lofty 13.6% of the stock's available float. In fact, with 3.9 million shares sold short, these bearish bets are at their highest perch since March 2013. As such, it's possible short sellers have been purchasing protective calls to guard against any upside risk.

Regardless, it's getting pricey to purchase premium on CMG's near-term options, considering the equity's 30-day at-the-money implied volatility hit a 52-week peak earlier. In other words, premium on the stock's short-term options is pricing in extremely high volatility expectations at the moment.

Technically, Chipotle Mexican Grill, Inc. (NYSE:CMG) has been charting a path steadily lower for some time -- due in large part to last year's E. coli outbreak. Year-over-year, the shares are down 36%, and hit a nearly three-year low of $384.77 on June 14.

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