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Friday, January 21, 2011

Short burritos, Long GS

Chipotle (CMG) has had quite a run the past year. I personally enjoy Willy's but that's neither here nor there. CMG has gone from 93.81 to an astronomical 262 over the past 52 weeks. It's currently selling for 223 and a trailing p/e of 43.15. Expectations are extremely high for Chipotle, and one little slip up might cause the stock to plummet. One bump in the road I can foresee for Chipotle is rising food costs shrinking its already low margins. Also, if unemployment stays high, people might begin looking for cheaper alternatives. Because of this, I don't believe Chipotle can maintain its past performance. I am short chipotle by buying a bearish put spread of Jan 12 230/220. I purchased the Jan 12 230 put and sold the 220 put for a net costs of $480 per spread.

I decided to finance this buy selling 1 JAN 12 Goldman Sachs put for $1,105. I would never buy Chipotle at 223, but I'd love to buy GS $11.05 lower than it is today.

If Chipotle is lower than 220 come Jan 12, the max return is $520 or 108%

If GS is greater than $150, you keep the full $1,105. If not, then you have to own 100 shares of goldman at an effective price of $138.95.

The potential combined return is $1,625 on a trade that you don't even have to spend any money on initially.


Ben said...

This trade was initiated in my virtual portfolio.

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