Chipotle Option Traders Suggest Declines Ahead

Chipotle Mexican Grill, Inc. (CMG) - Mexican-style fast food maker, Chipotle, appeared on our ‘hot by options volume’ market scanner today after one investor initiated a put spread in the October contract. Shares of the “unburritable” restaurant chain bucked the overall bearish tone in the market by edging 0.5% higher to $96.75. The put spread observed on CMG is likely the work of an investor seeking downside protection on a long stock position. The transaction involved the purchase of 3,000 puts at the October 90 strike for 1.06 apiece, spread against the sale of 3,000 puts at the lower October 85 strike for 38 cents each. The net cost of the trade amounts to 68 cents per contract. Downside protection from the puts will kick in if Chipotle’s shares fall about 8% from the current price to breach the breakeven price of $89.32 by expiration. Interestingly, CMG seems to have reached a level or resistance at the current price of $96.75. The stock rose to $96.75 back on August 4, 2009, before slipping down to a two-month low of $81.12 on September 1, 2009. Chipotle’s shares recovered during the month of September to climb once again to $96.75 today. Perhaps the investor feels the need for downside protection in case the stock heads back down to the support level at about $81.00 during the month of October. However, maximum gains from this put spread of 4.32 per contract would occur at and below the lower 85 strike.

Energy Select Sector SPDR (XLE) - Shares of the energy exchange-traded fund are trading 1% lower to stand at the current price of $53.90. Despite the slight decline today, investors expecting shares of the fund to improve scooped up married put options on the XLE. Traders purchased approximately 50,000 married puts at the December 48 strike price for an average premium of 1.52 apiece. Shares of the underlying stock were trading near $53.64 at the time of the transaction. The simultaneous purchase of the stock and put options suggests investors are hoping the XLE will experience bullish movement over the next three months. But, traders are protected in case shares actually decline 14% from the current price, through the breakeven point at $46.48 by expiration in December.

General Electric Co. (GE) - The technology, media and financial services company experienced a more than 1.25% decline in shares to $16.50. The firm disclosed in a filing that its GE Capital unit plans to sell $1 billion in FDIC (Federal Deposit Insurance Corp.) backed senior fixed-rate notes. Some option traders displayed bearish sentiment by initiating put spread in the November contract this morning. It appears 5,000 puts were purchased at the at the November 16 strike for 91 cents apiece, and spread against the sale of 5,000 puts at the lower November 14 strike for 32 pennies each. The net cost of the protective play amounts to 59 cents per contract. GE’s shares must decline another 7% from the current price for downside protection to kick in beneath the breakeven point at $15.41.

Nike, Inc. (NKE) - We noted yesterday’s flurry of excitement in Nike call options ahead of Tuesday’s earnings and in the event, those option bulls did well. We noted the activity at the October 60 strike where calls changed hands at an average premium of 1.78. With Nike’s share price 7.8% higher at $64.78 today those calls are now changing hands at 5.10 each. Investors continue to display bullish sentiment towards the maker of footwear and apparel and have shifted gears to the October 65 strike price where more than 9,000 calls have been traded so far. The 1.25 premium those call options command is 215% higher than on Tuesday. Option implied volatility declined by around one-third to 25% today.

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