NaughtyPines

IF THE OPTIONS AREN'T LIQUID, DON'T PLAY THEM: CMG

NYSE:CMG   CHIPOTLE MEXICAN GRILL INC
Generally speaking, I like earnings plays that will have juice in them with a defined risk setup (e.g., iron condors). This ordinarily means that some of the lower priced fare on the plate just won't produce enough juice for me to bother with unless I open up the floor to using undefined risk strategies like short strangles, which ties up buying power I like to keep free for my bread-and-butter trades in index ETF's and TLT             . Consequently, I generally only play underlyings priced greater than $100.

There are a few that would fit that bill next week: IBM             , CMG             , BA, for example (don't worry, I haven't forgotten about AMZN             , the other biggie).

You will notice glaring problems with playing some of these underlyings as you work through options setups, and most of the time it really boils down to one thing: liquidity.

Just as an example, wouldn't it be great to play CMG? The price of the underlying is $700+, and it's bound to have loads of juice to give up in the inevitable post-earnings announcement volatility contraction. The unfortunate thing is that the spreads are horrific: the bid/ask spread on the 800 strike for the Oct             30th expiry is $1.00 wide -- 4.90 bid/5.90 ask. I will never get a truly "fair" price if I have to deal with spreads of that sort ... .

I would love to play Chipotle, but until they get more liquid options, I'll stick to just eating their burritos ... .

(As a side note, I think the liquidity of IBM             options for the Oct             30th expiry aren't "horrible," but that's one of those stocks that isn't that volatile as a general matter and consequently doesn't increase as dramatically in volatility around earnings, so the premium isn't quite as "sweet").
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