A price-target hike from Goldman Sachs (GS) on Monday is boosting Chipotle Mexican Grill (CMG). And Chipotle stock may keep climbing after already hitting an all-time high.
Chipotle joined the Leaderboard Leaders List on Feb. 7, and has since confirmed some invaluable lessons on how to handle growth stocks, including how to trade options to manage risk. As Chipotle stock has shown, using options can be particularly effective during earnings season.
The fast casual burrito king has also shown how to manage your portfolio by starting with half positions in a stock, rather than going all in at once.
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Chipotle Stock Gets Price-Target Hike To 1,000
After going through a rough few years starting in 2015, Chipotle has been on the rise since finding a bottom in February 2018. The stock showed its newfound resilience during the bear market in Q4 of 2018, managing to bounce back with a breakout from a double bottom.
As the stock market showed renewed strength and CMG stock gapped up to more than an 11% gain on Feb. 7, we added Chipotle to the Leaderboard Leaders List. We established a half position with a purchase price of 573.32. (A half position in Leaderboard represents $62,500 based on a simulated $1 million portfolio of up to eight stocks.)
Initially taking a half position rather than a full stake allows you to have skin in the game while still maintaining your risk. We held our position in Chipotle until May 23, when the stock gapped down below its 50-day line in heavy volume. The move came as the general market was coming under heavy selling pressure.
Our sell price was 664.44, allowing us to lock in a nearly 16% gain in a little over three months.
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How To Trade Options And Minimize Risk
What is the advantage of learning how to trade options? It can help you establish a foothold in a stock without risking an undue amount of your cash in case the trade goes against you. Again, this is particularly helpful during earnings season. It’s risky to buy any stock just before it reports earnings, since you don’t know how the market will react.
So here’s how we used options on CMG stock as the company was getting ready to report on July 23.
We purchased a half stock position in Chipotle again on July 8 at 750.47. On July 23, prior to Chipotle reporting, we converted our position into an option. The strike price was 732.50 with a July 26 expiration date.
By making that shift to an options trade, we capped our risk ahead of earnings and locked in a profit on the regular half size position. We picked up one contract as the option was trading at $23.65. (One contract entitles the buyer to purchase 100 shares of the stock upon expiration.) The risk worked out to $2,365 (100 x 23.65) but we treated it as a half size options trade.
Chipotle posted strong results July 23, and shares reacted favorably. The option was converted to shares after its expiration on Friday. With that, Chipotle went back on the Leaders list as a regular stock holding.
Chipotle stock closed Monday’s session with a 3.8% gain after getting a boost on bullish comments from Goldman Sachs. It had a strong finish as it closed near the very top of the day’s price range as volume picked up. In a sign of market leadership, the relative strength line is at a new 52-week high. Volume for the day came in well above average.
To learn more about how to trade options, check out IBD’s The Basics Of Options Trading course.
Follow Matthew Galgani on Twitter at @IBD_MGalgani.
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