To be quite honest, deciphering unusual options activity is a crapshoot. The ugly truth is that the transaction itself is the only metric you can fully trust. All the other stuff about detecting early buy or sell signals? I would say most of it is marketing copy.
Now, I suppose that for those who have deep knowledge of the derivatives market, unusual options screeners are akin to having a runner on second base. Your teammate can now attempt to read the opposing catcher’s signals — and relay to you what could be coming next.
Of course, much like interpreting unusual options activity, the signal could be profitable (or it might not be). Without some idea of probabilistic inference, it’s difficult to know when to act on a potential move or just let it pass.
That’s not to say that such screeners of the derivatives market aren’t useful because they are. You just need to know what to look for. Case in point is Chipotle Mexican Grill (CMG).
Those paying attention to business news will know that Chipotle has been struggling. Since the start of the year, CMG stock has hemorrhaged more than 34% of value. As Zacks Investment Research pointed out, Chipotle has grown increasingly dependent on its digital strategy, which accounts for 35.5% of sales. While that may sound encouraging, comps are projected to be flat for fiscal 2025.
Needless to say, if the digital pivot isn’t executed well, CMG stock could face even more pain. However, I don’t think that doomsday scenario is going to pan out.
Granted, it’s difficult to be optimistic, in part because of the unusual options activity. On Monday, total options volume for CMG stock hit 136,772 contracts, representing a 98.51% lift over the trailing one-month average volume. However, options flow — which focuses exclusively on big block transactions likely placed by institutional investors — showed that net trade sentiment slipped to $197,100 below parity, thus favoring the bears.
On the surface, that’s not great — but Wall Street almost certainly isn’t looking at this quantitative signal.
While much has been made of the percentage losses that CMG stock has incurred, from a market breadth perspective, the situation is remarkably clear. In the past 10 weeks (not inclusive of Monday’s session), the equity has printed only two up weeks, with the remainder being down weeks. Thanks to an overall negative trajectory, the sequence can be labeled 2-8-D for easy classification.
What makes this sequence compelling is that while the following week’s upside probability is essentially a 50/50 wager, over the next few weeks, the tendency is for CMG stock to rise. However, this observation is made from in-sample data, which runs from January 2019 to July 2025. It raises the question, is betting on the 2-8-D sequence effective in other sentiment regimes?
To answer this question, I performed three out-of-sample tests to establish a probability of causality (rather than merely make an observation of correlation):
The first test covered CMG stock from its initial public offering through the end of 2024.
The second test covered Chipotle during the back half of the 2010s decade.
Finally, the third test covered the post-COVID period from 2022 through 2024.
Essentially, the 2-8-D has consistently been a strong reversal signal in all sentiment regimes except for the second half of last decade, when Chipotle was struggling from its food-poisoning crisis. Other than that malaise, whenever this rare signal has flashed, it has statistically been a reliable reversal indicator.
In case you’re wondering, if CMG stock continues to fall down throughout this week, it would end up printing a 1-9-D sequence. In case you’re wondering, Chipotle in its history as a publicly traded entity has only flashed this sequence one time.
Obviously, with a datapoint of exactly one, it’s impossible to extract a statistical lesson. However, in the following week, CMG stock did pop higher, with a massive return of 13.28%. What I’m trying to say is that sequences that are overwhelmingly bearish represent an unusually rare phenomenon.
When they happen, they usually resolve to the upside.
If I had a vote for the most tempting bull call spread of 2025, it’d go to the 40.00/42.50 bull spread expiring Oct. 17. This transaction involves buying the $40 call and simultaneously selling the $42.50 call, for a net debit paid of $89 (the most that can be lost in the trade).
Should CMG stock rise through the short strike price ($42.50) at expiration, the maximum profit is $161, a payout of nearly 181%. Breakeven sits at $40.89, which I believe is very reasonable.
What makes this transaction so enticing is that the Street isn’t paying attention to the 2-8-D sequence. Most people are focused on the digital strategy and flat comps but guess what? These retreaded arguments have been well baked into the CMG stock price.
You want an edge? You must apply asymmetric warfare, using any and all advantages necessary to win. Anything else is just useless background noise.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
