Option Investor

Option Writer Portfolio - May

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CMG - Chipotle Mexican Grill, Inc. (Chipotle) operates fast casual, fresh Mexican food restaurants serving burritos, tacos, bowls and salads. Earnings are due on April 23rd. This is most likely the reason for the high premium on the options. Selling options ahead of earnings is generally riskier than at other times. However, it is a calculated risk that can payoff. We might find ourselves creating a short strangle and capture the decline in risk premium after the EPS report event.

We are selling the May 95 strike price in order to have as much room as possible. Looking at the chart below, the next support level is around 105 and then not much until 95. Not shown, the RSI and Stochastics are both starting to curve upward. The max marginers can sell a total of 3 of these and not be over exposed "marginally." However, it should be noted that all trades established ahead of earnings are higher risk and should be held tight. Enough disclaimer. The last time we traded this stock it ended up hurting. So we could also sell the 90s to give another 5 points downside. The technical exit could be at 105 since the 50 DMA and the price support are both hanging around the 105 level. That will be the first alert to adjust.

Risk Management for CMG
Strike Stop = $ 95.00
Cost Basis Stop = $ 91.70
Technical Stop = $ 95.22
Premium Stop = $ 97.95

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