Last-Minute Call Buyers Target Chipotle Mexican Grill, Inc. (CMG)

Some call buyers are eyeing a Chipotle Mexican Grill, Inc. (CMG) rally by the end of the day

Dec 16, 2016 at 11:52 AM
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Amid a slew of food-borne illness incidents, Chipotle Mexican Grill, Inc. (NYSE:CMG) has dropped nearly 30% of its value year-over-year, with traders and analysts largely disappointed in the company's recovery so far. Today, though, the stock has added 2.1% at $390.32 on news the burrito specialist has added four members to its board, under pressure from activist investor Bill Ackman. This development has CMG calls flying off the shelves, with some speculators betting on a last-minute rally.

Specifically, call options are changing hands at double the typical intraday rate. In fact, call volume is running in the 99th percentile of its annual range, while call and total open interest are already seated just 1 percentage point from annual highs. Most active today is the December 400 call, where it appears some bullish traders are purchasing new positions. Buyers of the call are betting on CMG shares bounding above the $400 century mark before tonight's close, when the front-month option expires.

Taking a step back, a preference for CMG calls is nothing new. In fact, the stock's 10-day call/put volume ratio of 1.21 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits within the top third of all readings from the past 52 weeks. However, from a contrarian perspective, an unwinding of this optimism in the face of Chipotle's ongoing troubles could send the stock sliding lower.

In any case, options buyers targeting near-term strikes could be getting a good deal at the moment. CMG's Schaeffer's Volatility Index (SVI) of 31% sits in the low 21st percentile of its annual range. Put simply, this indicates the equity's short-term options are pricing in muted volatility expectations.

Outside of the options arena, CMG is no stranger to skepticism. For example, nearly 20% of the stock's total float is wrapped up in short interest. In fact, it's possible some of these short sellers have been purchasing out-of-the-money calls, hedging against extended upside in the underlying.

As noted earlier, CMG has been slumping on the charts throughout the year, tapping a three-year low just north of $350 in early November. Though the stock is on pace to end this week with a gain -- bucking a historically bearish trend -- Chipotle Mexican Grill, Inc. (NYSE:CMG) seems to be running into trouble at the descending 50-day moving average, which has served alternately as both support and resistance in recent months.

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