The ‘Insider Secret’ I Can Finally Share About a Popular Cult Stock
Knowing that you timed a trade perfectly is one of the best feelings an investor can experience. Even if you’ve had scores of winning trades over the course of your trading career, the rush of making a great call never goes away.
Today, I want to talk about a recent victory of mine — not to brag, but because there is something more I want to share with you. If you’re ready to take your trading to the next level, this could be a game changer.
Earlier this month, I warned traders to stay away from former market darling Chipotle Mexican Grill (NYSE: CMG).
The company has been desperately spending to restore its reputation and sales after outbreaks of E. coli and other food-borne illnesses at several locations sickened hundreds of people across the country. But a look at the company’s fundamentals (and its empty restaurants) made it clear that a turnaround had so far eluded the company.
Despite this, shares were trading at an astronomical 115 times estimated earnings, the highest in the stock’s history. And with the company scheduled to report Q3 earnings on Oct. 25, my models were showing a high likelihood of an earnings miss.
Sure enough, when the company announced earnings on Tuesday after the close, it missed by a country mile. Profits fell a whopping 95% year over year on a 15% drop in revenue.
The stock got slammed, and those who heeded my warning to sell in mid-October would have gotten out when shares were trading around $415 — 11% higher than Wednesday’s close. Hopefully, some of you even used my research to initiate bearish positions and make some money off Chipotle’s foibles.
Like I said, timing a trade like that feels great, but my goal today is to give you a peek into what I couldn’t show you that day.
If you read my article, you may recall that I alluded to an alternative bearish strategy based on a Wall Street insider secret. With this trade, CMG could fall after earnings, stay put or even rise as much as 10% and still achieve the maximum profit.
This dramatically increased my odds of success, which is always comforting, but especially so during high-volatility periods like earnings season. In fact, I’ve see this strategy increase the odds of success to as high as 90% per trade.
I couldn’t give out the specifics of the Chipotle trade because I had just released them to The Insider’s Club — a small group of regular traders who are in on this (legal) Wall Street insider secret.
But since we’ve closed that trade — booking a 20% profit in nine days, or 811% annualized — I’d like to walk you through it so you can decide whether you’re ready to start trading like an insider too.
We used a type of vertical options spread known as a bear put spread. If you’re not familiar with the strategy, it’s much simpler than you’d think.
What is a Bear Put Spread?
A bear put spread involves two options on the same stock or ETF with the same expiration traded together:
1 long put (purchase)
1 short put (sale)
Here’s what you need to know about them:
1. Bear put spreads cost money because you always purchase a long put that has a higher strike price (more expensive) than the put you sell.
2. You will always trade the same number of long and short puts — if you buy one, you sell one.
3. The most the trade can be worth is the difference between the strikes.
4. The most you can lose is what you pay to initiate the trade.
5. The goal is for the stock to stay below the short put strike. As long as the stock is below that level on expiration, the maximum profit is achieved.
Here is the exact trade as I recommended it to The Insider’s Club on Oct. 7:
The Strategy: Make 20% if CMG Stays Below $460
Currently, CMG is trading around $427.50. This week, I recommend buying (to open) a bear put spread on CMG for a net debit of $4.
This spread will use two separate put trades:
For our long put, buy (to open) CMG Nov 465 Puts.
For our short put, sell (to open) CMG Nov 460 Puts.
Your broker should allow you to execute both trades with one spread order.
Remember, for a bear put spread, you will always trade the same number of long and short puts with the same expiration month. These options expire on Nov. 18.
Each spread you buy will have a net cost around $400 (assuming you enter the trade at the “buy under” price). Because each contract controls 100 shares of the underlying security, we multiply the $4 net debit price times 100.
This trade breaks even if shares rise to $461 (long put strike price of $465 – spread cost of $4), about 8% above current prices.
Target: The goal here is for CMG to be below $460 when our options expire on Nov. 18.
If CMG is below $460 on Nov. 18, the spread will achieve its maximum value of $5 (long put strike price of $465 – short put strike price of $460). However, to make sure we hit our goal, we’re going to set our exit target slightly below the spread’s maximum value to make our order more attractive to the market makers.
Once you’ve bought the bear put spread, immediately place a GTC limit order to close the entire spread for a net credit of $4.80 (using a “sell to close” order). If the spread hits our target price, we’ll generate a 20% gain in 43 days, or 170% annualized.
The November expiration gave us plenty of time to profit from a post-earnings sell-off. But as it turned out, the stock started dropping like a rock after we initiated the spread. It hit my target just nine days later and we automatically exited for a quick 20% profit.
I recommend a spread trade like this to The Insider’s Club each week. And while it’s a great feeling to call a stock move perfectly, the beauty of this strategy (and its bullish counterpart, the bull call spread) is that you don’t have to. Even if a stock moves against you, you can still come out a winner.
That makes this strategy extremely powerful, and it’s why we expect it to generate a combined $30 million in new wealth for Insider Club members in the next year alone. If you have a few more minutes, I urge you to go here to learn more about The Insider’s Club.