High-Flying Chipotle Sees Put Buying

08/05/2011 7:00 am EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

A sharp spike in put-buying activity on Chipotle Mexican Grill (CMG) seems curious given the stock’s stellar performance, but a closer look suggests profit taking, not speculation about a coming reversal.

Puts have become the options of choice on Chipotle Mexican Grill, Inc. (CMG), according to data from the major exchanges. In fact, on Wednesday alone, traders on the International Securities Exchange (ISE) bought to open 1,030 puts on CMG, compared to just 169 calls, netting the stock a skeptically slanted single-day put/call volume ratio of 6.09.

This week's most active strike was CMG's September 250 put, where 1,053 contracts were exchanged on Wednesday alone. About 87% of these puts traded closer to the ask price, suggesting they were purchased, and open interest at this back-month strike rose overnight by 948 contracts. So, it seems safe to assume that new bearish bets were added here yesterday.

However, the day's substantial dose of put buying simply continued a recent trend for CMG. During the past ten sessions, speculators on the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.38 puts for every call on the restaurant chain. This ratio ranks above 78% of other such readings taken during the previous year, indicating that options traders have purchased puts over calls at a faster pace only 22% of the time.

Checking out the charts, CMG is actually faring quite well. The stock has more than doubled in value over the past 52 weeks and is trading comfortably above long-term support at its ten- and 20-week moving averages. More recently, CMG has also found a firm foothold atop the round-number $320 level.

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In light of this stellar price action, it's possible that CMG shareholders are buying puts in order to lock in some paper profits, rather than speculate on a drastic short-term pullback in the share price.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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