Chipotle Mexican Grill (CMG) shares took a hit after CEO Brian Niccol left to try to turn around Starbucks. Chief executive turnover is often a knee-jerk reaction, so this presents a potentially profitable move for select traders. Take a step back at Chipotle. It’s consistently impressed with quarterly earnings beats. Results have been strong over the past four quarters, and the company raised forward guidance in its most recent earnings report. Because of the optimistic outlook for CMG, I see this pre-market dip as an opportunity to invest in a company that seems virtually immune to recessions. In addition to fundamentals, we also have to consider technical aspects. Here’s a one-year daily chart of CMG: The 200-day simple moving average (SMA) is widely viewed as a support area by market technicians. We are seeing signs of mean reversion around this level, with recent price action showing higher highs and higher lows. The relative strength index (RSI) also moved out of oversold territory, further confirming the uptrend. The only caveat is that markets can sometimes be influenced by sentiment, so it’s important to monitor how price action unfolds an hour after the opening before entering a bullish trade. The Trade To establish a bullish position in CMG, I plan to use a strategy called the Bull Call Spread. This involves buying an at-the-money (ATM) call option and simultaneously selling an out-of-the-money (OTM) call option in the same transaction. Chipotle was one of the more volatile stocks on Tuesday. The deal assumes Chipotle trades at about $51 per share. Adjust your prices accordingly based on the latest trends. Buy $51 call, expiration September 6th Sell $52 call, expiration September 6th Cost: $50 Potential profit: $50 The strike price will depend on the price of CMG when one wishes to enter the trade. The long call should be in-the-money and the short call should be out-of-the-money, thus constructing an at-the-money bull call spread. It’s best to give these trades 24-35 days for them to work in your favor, especially when dealing with knee-jerk reactions like this. If CMG trades at or above the short strike price before expiration, the trade may generate a return of 100% of the amount risked. For 50 contracts, this is equivalent to risking $2,500 for a potential gain of $2,500. Disclosure: I will be placing a similar trade in my account today. All opinions expressed by CNBC Pro contributors are theirs alone and do not reflect the views of CNBC, NBC UNIVERSAL, its parent company or affiliates, and may have been previously disseminated by them on television, radio, online or other media . The above is subject to our Terms and Conditions and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not apply to your particular situation. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. Click here to view the complete disclaimer.
