While most of my trading is done on index options, every so often I find a stock that piques my interest in which to place a trade. Chipotle (CMG) caught my eye late last week as the implied volatility for at the money options exceeded 40% for the February 18 2015 normal monthly expiration cycle. With Chipotle this is usually the case in the couple of weeks before earnings.
Above chart shows how the current implied volatility stacks up with 6 month historical volatility. While the volatility could still rise, I believe the options are priced by the market makers for movements relating to the upcoming earnings report, and that 40 to 45% is what we'll see until the report is released.
On Friday, 9 Jan 2015 I was filled at $5.85 net credit for the 825/875 call, 600/550 put Iron Condor for Feb 18 2015 expiration in CMG.
From trading CMG in the past, I've seen that after spikes or drops in price action that CMG's price seems to chop for little while until the next big event. For me, I see the next big event as the February earnings report that takes place on 3 February 2015.
Some will ask, "Aren't you afraid of the gap up or down when earnings are released?!"
This I will answer a resounding "Not at all."
Here's how I'm building my burrito:
I intend to close the trade at 50% of max profit or $275. The Analyze tab pic above has been fast forwarded the 3rd of Feb. Just due to Theta, and with volatility staying in the region of 40 to 45%, CMG can be any where between the price levels of 665 or 750 to achieve this. At any time I can pull $275 out of the trade, it will be closed by limit order. On Monday, 2 Feb 2015, I will be closing the trade regardless of position to avoid the earnings gap. Yes, I'll have Guacamole with that.
I will update this trade here and on Twitter @B50cal1978
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As always, Good Luck!
STT
I am happy to say that I was able to book a winner! I am not happy to say that I had to break my own rules. As stated in the post, I intended to close this trade before earnings for a simple theta trade. What happened on the 3rd of February when I went to close the trade was a complete lack of liquidity at the short 825 strike call. Literally 0 on the bid side. I chose to keep the trade into earnings due to dollar headwinds being reported by similar companies. I was also within about $10 or 1.3% of my opening price, or 15% away on the call side, and 20% away on the put side. CMG dropped about 6% after earnings were reported, and the Implied Volatility got crushed from about 40 to about 20. CMG Iron Condor opened for $5.85 net credit. Closed three weeks later for $1.75 net debit for a $4.10 profit.
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