≈ From the Options Report ≈
The Chipotle Mexican Grill stock (NYSE: CMG) was one of the setups presented on the Options Report this last weekend. As pointed out by Coach Tyler Craig, the stock got smacked on volume and tested the lows.
Can this be a straight bear play if it breaks below the ≈$658 support? Yes, sure. If you are a directional trader and have the S.T.E.P. rules in place (stop loss, target, entry trigger and position sizing), go ahead.
But when you look at some of the volatility characteristics, especially when the IV jumps during a nasty drop like that, options become pricey. That is when an alternative type of strategy comes into play: the bearish credit spread (Bear Call Spread). You’re still directional on your bet but not taking as an aggressive posture as you would in a pure Delta play.
Because you are not out of your mind, you wouldn’t trade a straight Naked Call. Instead, you sell an OTM call and then, at the same time, buy an OTM call a few strikes higher to hedge the risk. This will net a credit on your account. Ding Ding. As long as CMG stays below the short strike and doesn’t move too much in our direction, we make money. That’s the power of time decay.
#TeamTackle already knows that max loss, short call Delta, time until expiration and when they will take profit is a matter of following their system’s rules. That is how they play the Mexican Grill without getting indigestion.
If you would like to watch a full analysis on Chipotle, head over to our Instagram Stories, where Coach Noah Davidson will talk more about the stock.
Chart of the Day
Playing the Mexican Grill
The chart above depicts a hypothetical Bear Call spread on CMG. As long as the stock stays below the short strike, we make money from both time decay and volatility drop.
Can CMG run against the short strike? Sure. That is why you should have rules on what to do when such a thing happens.
Video of the Day
What is a Bear Call Spread
A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset. The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade.
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