WEBINAR: VIX On Five Highly Active Stocks, Weds., October 3 at 6pm ET w/Mark Sebastian and Jill Malandrino. CLICK HERE FOR INVITE AND TO REGISTER.At the Value Investing Congress on Tuesday, fund manager David Einhorn made a short case for shares of Chipotle Mexican Grill (CMG), arguing that Yum! Brands! (YUM) was going to succeed at taking market share from the burrito-maker with its new Cantina Bell line at Taco Bell. Shares fell 6% in the moments after it became clear that CMG was Einhorn's target, as he has developed a reputation for successfully shorting high-priced stocks. The stock closed down 4% on the day, and short option-implied volatility rose 8%. CMG is down nearly 14% over the last twelve trading sessions, and is down more than a third from its high set back in April.
fig. 1. CMG 5-day Prices and November Implied Volatility
fig. 2. CMG 30-day Implied Volatility vs. 60-day Implied Volatility
We will sell October options and buy November options at the same strike. The resulting calendar spread is expected to profit if CMG volatility declines over the next few weeks. We do not expect a large drop in October implied volatility as the options should stay well bid into earnings; rather, we are looking to profit from a reversion to the normal pre-earnings ratio between first and second month options. We will exit the spread before earnings are announced on October 18th at the latest. Trades: Sell to open CMG October 300 puts at $11.30 and buy to open CMG November 300 puts for $14.90. OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits. Jared can be followed on Twitter at twitter.com/CondorOptions.