The Striking Price

Betting on Chipotle Options

JPMorgan upgrades rating on the chain’s shares, which have been ravaged by food-poisoning incidents. Can it get its heat back?

By STEVEN M. SEARS

Saturday, April 23, 2016

If you became ill after eating at a restaurant whose parent company had been implicated in food-poisoning outbreaks in several states, would you continue to patronize the chain’s eateries? Probably not. But some on Wall Street think that Chipotle Mexican Grill, whose stock has been ravaged by repeated food-handling missteps, will make a comeback

The incidents essentially have cost Chipotle (ticker: CMG) three years of profits. Still, ahead of the company’s Tuesday first-quarter earnings report, JPMorgan analyst John Ivankoe is telling clients that the worst is probably over. He has raised his rating on the burrito giant to Overweight from Neutral, essentially urging clients to buy shares that he’d previously advised them to sell.

In a note, Ivankoe, who apparently likes a pun, wrote, “The upgrade is predicated on the belief that despite the food-safety crisis that has weighed on shares for the past nine months, CMG remains a meaningful brand, continues to grow its footprint, is presented with low expectations, and has the balance sheet to stomach the costs [meaning meal giveaways] associated with regaining customer trust.”

By December, if all goes according to JPMorgan’s expectations, the stock will be trading at $510, still far below its 52-week high of $758.61, but well above the $448.48 at Thursday’s close. The bank’s previous price target was $465.

After the note was published, a U.S. district judge for the Southern District of Florida let litigation seeking class-action status move ahead. The plaintiffs accuse Chipotle of falsely stating that its food is free of genetically modified organisms.

When the company’s stock was around $472 in late March, we recommended buying the June 450 put. Now, JPMorgan is telling clients to consider selling Chipotle’s May 425 puts and buying a May 485/525 call spread.

Selling the put obligates investors to buy the shares at $425, or to cover the put. Buying the 485 call and selling the 525 call creates an upside profit range. When the trade was priced, it could be executed for a slight credit—the difference between what you’d get for selling the put and the cost of buying the spread. So, the options market would be paying you. That matches the spirit of Chipotle, which is giving away food in an effort to lure back customers.

THE CBOE VOLATILITY INDEX, known across the world as the U.S. stock market’s fear gauge, has become a global phenomenon. CBOE Holdings (ticker: CBOE), which calculates the VIX, says that it recently began providing a reading during Asian and European trading hours. Previously, it had done so only during U.S. stock market sessions.

The VIX is now quoted from 3:15 a.m. to 9:15 a.m., Eastern Standard Time. Previously, it was quoted only from 9:30 a.m. to 4:15 p.m. to cover U.S. trading. The extension follows the broadening of trading hours for Standard & Poor’s 500 index options, which are needed to calculate the VIX.

Since the 2008 financial crisis, the S&P 500 and thus the VIX have become proxies for global stock markets. When bad stuff happens overseas, many investors turn to the U.S., which has the world’s largest and most liquid markets.

We proposed extending the VIX’s hours last July, a time when global markets feared that Greece could collapse. Had a real-time VIX reading been accessible back then during non-U.S. trading hours, investors could have better evaluated the markets.

Now, China’s opaque economy and England’s June vote on leaving the European Union have replaced Greece as potential market menaces. The extended hours should help investors to better contextualize world events and further cement the VIX’s position as a pre-eminent sentiment indicator.

Reprinted by permission of Barron's Online, © 2016 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.

Email Options Professionals

Questions about anything options-related?
Email an options professional now.

options@theocc.com
Speak to an Options Professional!
Chat with Options Professionals

Questions about anything options-related?
Chat with an options professional now.

Start Live Chat

REGISTER FOR THE OPTIONS
EDUCATION PROGRAM

  • Free, unbiased options education
  • Learn in-person and online
  • Advance at your own pace