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In my previous article, I detailed the valuation for Chipotle Mexican Grill (NYSE:CMG) by DCF and other methods. It is now time to make a very short-term trade disregarding fundamentals and focusing on the impact the reported EPS relative to expectations have had on its share price and how to profit from it.

Chipotle reported $1.97 EPS for Q1 of 2012, up from $1.46 in Q4 of 2011. This represents a 34.7% increase in its net income quarter over quarter. Its cash flow, however, changed from a positive $58.1 million to a negative $31 million, mainly due to its stock-based compensation and no positive effect of maturities of investments, which helped by almost $80 million to the company's cash flow last quarter.

Earnings surprise history for the last 4 quarters (Click to enlarge)

Quarterly Earnings Surprise History

Date Reported

EPS

Consensus EPS

% Surprise

% move

the next day

04/19/2012

1.97

1.93

2.07%

-2.6%

02/01/2012

1.81

1.83

-1.09%

-2.1%

10/20/2011

1.9

1.85

2.7%

8.3%

07/19/2011

1.59

1.68

-5.36%

-0.6%

As you can see in the table above, the stock has moved up an average of 0.75% up the day after each of its last four earnings releases. This is 3.4% in absolute terms. With 8.3% being the maximum move on October of last year, I will go through several strategies, their returns and break-even points; it will be up to you to choose the one you feel more comfortable with, if any.

Wall Street Expectations

Chipotle is expected to report earnings of $2.30 a share and revenue of $707 million. Last year, Chipotle's income came in at $1.59 and revenue was $571.6 million

As this table indicates, the surprise Chipotle could bring to the table is expected to be low, as it has been for the past years.

The Trades

For the trades, I chose them all to be Iron Condors because of the small surprise Chipotle presents every quarter and the relatively moot price reaction to its earnings, along with the volatility boost that comes as earning releases approach, which allows us to sell options (both calls and puts) at higher prices.

Remember that an Iron Condor consists of selling both a call spread and a put spread at different strike prices; they will all expire this Friday.

I have strategies for aggressive, moderately aggressive and more conservative investors, all involving an Iron Condor, varying in strike prices as you will see next.

Aggressive Strategy

This strategy is for aggressive investors that think Chipotle's shares will move equal to or less than the absolute average during the past 4 quarters the day after earnings. This implies a 3.4% move either way.

This gives the stock only around $13.50 to move in either way, so investors who use this strategy might argue that since there will most probably not be any change in EPS regarding to expectations, Chipotle's share price should not move much.

Let's see how this strategy would look:

  • Buy to open 1 CMG put at strike price $380 for July
  • Sell to open 1 CMG put at strike price $390 for July
  • Sell to open 1 CMG call at strike price $410 for July
  • Buy to open 1 CMG call at strike price $420 for July

This is all done in one transaction and would have an income of $506 per contract, needing to have the remaining $494 in cash in your account ($1,000-$506=$494) in case this trade went bad and you needed to purchase back your Iron Condor at the full spread price, which is expressed as $10 per contract, or $1,000, as every option contract represents 100 shares.

This is how the trade will look like this Friday: (Click to enlarge)

This strategy has very tight break-even points, meaning the stock can only move between $384.94 and $415.06 by Friday, around a 4% move, and it looks like a coin-toss, as the strategy's ROI is 50.6% and the maximum loss is 49.4%.

Moderately aggressive strategy

This would be done if you are expecting a move of 6% or less the day after earnings, an above-average move but below the high of 8.3% on October of last year.

Let's see how this strategy would look:

  • Buy to open 1 CMG put at strike price $370 for July

  • Sell to open 1 CMG put at strike price $380 for July

  • Sell to open 1 CMG call at strike price $420 for July

  • Buy to open 1 CMG call at strike price $430 for July

This is all done in one transaction and would have an income of $279 per contract, needing to have the remaining $721 in cash in your account ($1,000-$279=$721) in case this trade went bad and you needed to purchase back your Iron Condor at the full spread price, which is expressed $10 per contract, or $1,000, as every option contract represents 100 shares.

This is how the trade will look like this Friday: (Click to enlarge)

This strategy allows for a wider move, allowing shares to fall to $377.21 or up to $422.79 and still break even at expiration. This represents a 6% move either up or down. For 27.9% ROI, this one looks very attractive, but risky.

Before I go into the details of the conservative trade, I want you to see a chart of Chipotle's recent price performance: (Click to enlarge)

Notice how the price has, after running up in what seems like a straight line from around $300 to above $440, is has now stopped and is currently consolidating sideways within a range ($370-$420).

Chipotle's share price has just today (Tuesday) broken above its 50 day moving average, and buying programs seem to love it when a stock breaks above (or below) its 50 day moving average, sending the shares up (or down) some more (see September through January and draw your own conclusions).

For now, I would expect the 200 day moving average to hold as support for Chipotle's shares, so in my next trade the set-up will still be an Iron Condor, but with further space to run to the upside, as it is where I see the risk for this week. I am still bearish on the stock, as stated in my previous article.

Conservative Strategy

Let's see how this strategy would look:

  • Buy to open 1 CMG put at strike price $360 for July

  • Sell to open 1 CMG put at strike price $370 for July

  • Sell to open 1 CMG call at strike price $440 for July

  • Buy to open 1 CMG call at strike price $450 for July

This is all done in one transaction and would have an income of $118 per contract, needing to have the remaining $882 in cash in your account ($1,000-$118=$882) in case this trade went bad and you needed to purchase back your Iron Condor at the full spread price, which is expressed $10 per contract, or $1,000, as every option contract represents 100 shares.

This is how the trade will look like this Friday: (Click to enlarge)

This trade would allow for the shares to fall about $4 below its 200 day moving average, which has previously acted as support. To the upside, this strategy gives the stock room to go up more than $41; a 10.5% move up, which is not out of the question. This strategy would yield an 11.8% ROI, not bad for a technically sound trade in two days.

The break-even points for this trade range from $368.82 to $441.18, seems pretty safe.

Notice that this article was written on Tuesday night, so you might get even more credit per Iron Condor sold on all of these strategies on Wednesday.

Feel free to share your trades, ideas and commentary below.

Source: Trade Ideas For Chipotle's Upcoming Earnings Report

Additional disclosure: I will initiate the conservative trade in the following 24 hours.