Compelling Options Setup Reinvigorates Chipotle Stock (CMG) Bulls

A dominant staple in the fast-casual restaurant space, Chipotle Mexican Grill (CMG) is off to a rough showing for the first half of the year. As TipRanks contributor Steve Anderson noted, there was a point where Chipotle seemingly could do no wrong, with CMG stock exploding higher amid a surge in diner traffic. Unfortunately, the tables have turned, resulting in conspicuous underperformance.

Since the start of the year, CMG stock has declined by more than 12%. Over the past 52 weeks, the security dropped 17%, reflecting a lack of sustainable momentum. At the core of the problem is the consumer market: as Anderson mentioned, people are pulling back on restaurant consumption of all types. Amid a challenging economic environment and, recently, uncertainty about geopolitical dynamics, exposure to CMG seems treacherous.

At the same time, it’s also fair to point out that much of the headwinds regarding consumer health have likely been priced into CMG stock. To assume that shares will continue to decline would imply that the market has yet to digest the entirety of the bearish argument. It’s a point that market participants can debate, but I don’t find this thesis convincing from a near-term empirical standpoint.

When analyzing CMG stock, I’m looking at it from a batter-pitcher matchup perspective, meaning that if you’re bullish on Chipotle, there’s an options trade that might be worth further investigation.

Laying the Ground Rules for Analyzing CMG Stock

Under the traditional methodologies of market analysis — whether fundamental or technical — the practitioner attempts to color and contextualize the overall narrative. Fundamental analysts seek to identify misvalued enterprises; therefore, they focus on valuation ratios. Technical analysts attempt to identify mispriced stocks, which is why they’re trained to recognize patterns.

However, a central issue that renders both methodologies mathematically or scientifically fragile is the non-stationarity problem. Essentially, the main measurement metric — whether that be price-earnings ratios or the share price — changes (often wildly) across time and context.

For example, it’s erroneous to complain that a hot tech growth stock is overvalued because its PE ratio stands at 50x earnings when, years before, it was trading at only 10x earnings. A significant amount of time and context have passed, rendering numbers such as “10 times” meaningless in relation to contemporary dynamics. Below is a table showing CMG’s P/E ratio since 2021.

To establish a sensible statistical analysis, the underlying dataset must speak a unified language. One way to impose stationarity is to convert historical price data of a particular stock into market breadth sequences or sequences of accumulative and distributive sessions. Market breadth represents demand, and demand is a binary construct — it either exists or it does not.

Further, demand is inherently binary, which means that demand profiles can be categorized and quantified for the end purpose of probabilistic analysis. Without this uniform language, investors can’t utilize past analogs to better determine forward probabilities.

In the world of options, it’s not enough to know why CMG stock may move higher in this case; instead, there needs to be some idea about when CMG will make the projected move. Obviously, because options expire, market participants must utilize a risk-assessment model to account for time, not just magnitude.

Plotting an Aggressive Strategy for Chipotle Stock

Viewing CMG stock from a market breadth perspective, the security recently printed a 4-6-U sequence: four up weeks, six down weeks, with a net positive trajectory across the 10-week period. This is a rare pattern, where the balance of distributive sessions outnumbers accumulative, yet the overall trajectory is positive. Over the past 10 years, this sequence has occurred only 27 times.

Notably, in 66.67% of cases, the following week’s price action results in upside, with a median return of 3.05%. On Friday, CMG stock closed at $52.78. If the implications of the 4-6-U pan out as projected, CMG could hit around $54.39 relatively quickly based on past empirical data. And should the bulls maintain control of the market, they could reasonably attempt to push the stock toward the $55 level.

CMG’s performance has lagged behind broader benchmarks, such as the S&P 500 (SPX), so far this year.

Meanwhile, the company’s quarterly results, published in April, indicate consistent market beats going back to Q2 2023. The strong sentiment probably explains the company’s elevated P/E ratio of 43.5 compared to a sector median of 16.5.

What makes the above setup so intriguing is the implied shift in sentiment regime. Ordinarily, the chance that CMG stock may rise on any given week is only 51.55%, a modest upside bias. However, the statistical response implied by the 4-6-U sequence creates, to use a baseball analogy, a favorable matchup. Effectively, it incentivizes a debit-based options strategy.

With the above market intelligence in mind, intrepid options traders may consider the 53/55 bull call spread expiring July 11. This transaction calls for buying the $53 call and simultaneously selling the $55 call, for a net debit paid of $96 (the maximum loss that could be incurred).

Should CMG stock rise through the short strike price (55) at expiration, the maximum reward is $104, a payout of over 108%.

Is Chipotle a Good Stock to Buy Now?

Turning to Wall Street, CMG stock carries a Moderate Buy consensus rating based on 19 Buys, nine Holds, and zero Sell ratings over the past three months. The average CMG stock price target is $58.15, implying ~8% upside potential over the coming year.

See more CMG analyst ratings

Extracting Returns from CMG Stock Using Statistics

At first glance, Chipotle’s story might not seem especially compelling. The fast-casual giant has faced slowing momentum due to consumer headwinds. However, much of this pressure may already be reflected in the stock price. Technically, CMG is forming a rare pattern that historically signals a shift toward renewed bullish sentiment. In this context, a debit spread could be an attractive strategy.