CMG Earnings Option Trade Idea

• Posted by Robert Sinn
• on July 18th, 2012

I haven’t done a trade idea post in a while so I figured that with $CMG earnings coming up tomorrow after the close I would present an idea for a trade which I have put on. CMG suffered a big tumble in late June when some questions regarding same store sales growth emerged – since that time Citi has upgraded the stock and placed a $490 price target on the shares and CMG has enjoyed an ~8% bounce back from the June 28th low at $370.19:

 

CMG has recently found some resistance near the confluence of the falling 50-day SMA, the 38.2% Fibonacci retracement of the entire April – June correction, and the ‘psychological’ round number resistance at 400.

For CMG to continue its recent upside momentum the company will have to deliver strong quarterly results with impressive earnings and revenue growth, not to mention strong margins. For those interested in expressing a skeptical view on CMG which could be tremendously profitable in the event CMG’s results disappoint without taking much risk the following options trade idea might be worthwhile:

Short 1x Jul 400 calls

Long 1x Jul 410 calls

Short 1x Jul 390 puts

Long 2x Jul 380 puts

This trade currently offers a net credit of ~$2.60/share ($260 per option contract), the trade would sustain a max loss of $740 at or above $410/share. In the event CMG declines but does not fall below $380 (the put strike we are long), the loss is likely to be a bit less than $740 due to the fact that the 380 puts will be worth $1-2 depending on where exactly CMG is trading Friday morning.

370 is clearly a huge level on the CMG chart, a break below which could open considerable additional downside – this is the ideal scenario for this options trade. A decline to 350 on Friday morning would make the 2x 380 put position worth $6,000 and the 1x short 390 put -$4,000 giving a net gain of $2,000 which would be added to a roughly $380 profit from call side giving a total profit of ~$2,380.

In summary, this trade setup offers potential for substantial profit in the event CMG suffers a large decline while clearly defining risk. The most likely scenario will be a small gain in the event CMG stays between 390 and 400 – it is also worth noting that current option max pain is 395:

Source: www.optionpain.com

Feel free to ask me questions in the comments section

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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