Chipotle Mexican Grill (CMG, $82.50, up $0.84) will announce earnings after the market closes today and it will be interesting to see how the company is holding up. A slowing economy, higher menu prices and a salmonella scare could factor into where this stock opens on Thursday.

We have had good success buying put options on Chipotle in the past but we picked our entry points carefully. It’s kind of tough picking a position today with the earnings announcement because it’s hard to say how Wall Street is going to react. McDonald’s (MCD, $59.64, down $0.47) beat estimates today by eight cents (!) today and look at what its stock is doing.

Last time out, Chipotle beat Wall Street’s expectations by four cents a share. However, the stock fell 10% that day and closed right around $100. After the earnings were out of the way, the breakdown in the stock set up two beautiful trades in late May and again earlier this month. McDonald’s is trading lower because it told the Street it expects beef costs to rise 8%-9% and chicken costs to jump anywhere from 5%-8%.

Chipotle has said it was going to be tougher for them to hold gross profits at current levels due to the continuing rise in food costs. Although the company didn’t plan on a company-wide price increase it looks like that is happening now as gross margins may be getting squeezed.

There’s a magnet for Chipotle at $70 and the stock was below this level just one week ago. I got a good read on the breakdown to $70 and even called it a month ago. I still think $70 is way too much for this stock but the bounce off the $70 level is strong. The August 70 puts (CMGTN, $1.60, down $0.35) are out-of-the-money but we know Chipotle is capable of $10 swings on any given day.

This is one of those calls that might get me in trouble but I like the August 70 puts for a quick two-day trade. I’m looking at it this way. I’m using some of the huge profits I made in the past two trades to do a third. I’m wouldn’t risk too much but I think Chipotle heads back to the $70’s.

Rick Rouse
Rick@OptionsMentoring.com