Chipotle Mexican Grill (CMG, $69.01, down $14.79) has dipped below $70 again after opening the trading session at $74.29. The stock traded to a high of $75.50 but the bears have been firmly in control since the opening bell. I mentioned the after-hours trading was a good indication that the stock would probably open around $75 which we got.

I went out on a limb with the August 70 puts (CMGTN, $4.70, up $3.30) because trading options around an earnings announcement is the riskiest way to lose all of the cash you put up for a trade. However, sometimes you get such a good feel for a company, how it trades, and how it reacts to earnings announcements that it just doesn’t matter.

Chipotle is a stock that I have followed since it become a public company. Google (GOOG, $488.16, down $1.06) is another company I have followed since its IPO. The point is I rode Chipotle on the way up when Wall Street was drooling over their earnings announcements and profiled many call options when the stock made its run to $155. Now, I’m simply playing Chipotle on the way down.

The puts were profiled at $1.60 in the blog so we basically have a 200% gain on our hands. The puts have hit a high of $5.80 for the day when the stock hit a low of $67.40. That is probably going to be the peak for the day but it’s hard to say with the Dow struggling going into the final two hours of trading. The Dow is down 212 points to 11,420 and appears to be headed even lower. Set stops at $4.25 or you can sell half today and let the rest ride on Friday. This was ony a one or two-day trade so the position should be closed before the weekend, regardless.

Rick Rouse
Rick@OptionsMentoring.com

Wachovia (WB, $17.65, up $0.86) was up another 5% yesterday following Tuesday’s massive 29% gain despite an earnings report that I still find hard to fathom. The stock hit a low of $11.65 right after Tuesday’s anouncement of a $9 billion loss, rebounded that same day, and hit a high of $19.55 on Wednesday. Wachovia was expected to post a loss of $0.78 a share and came in at a loss of $1.27. I’ve heard of short-covering and even the “naked” short selling is being addressed but for Wachovia to post these kinds of gains, the shorts must be convinced that some sort of rally will hold.

Too bad for us because the whipsaw action has taken us out of some exceptional trades. The Wachovia January 15 calls (WBAC, $5.40, up $0.91) were profiled at $1.30 and were trading at $2.15 before the earnings announcement on Tuesday. When Wachovia opened lower to start the session the puts opened lower and then rebounded strongly. The exit point was $2.60 but some of you probably left the position open.

As fate would have it, Wachovia has rebounded for all the wrong reasons but for those of you that held onto the January 15 calls, continue to enjoy it. The calls hit a high of $6.30 for the day so many of you are looking at 200%-300% gains. Just make sure you set stops again as the calls will certainly continue to make wild price swings.

Interesting too was the action in the October 17.50 calls (WBJA, $3.00, up $0.65) yesterday. They opened the session at $2.30 and traded as high as $4.00 as 18,000 contracts traded hands. They could also do well if Wachovia can continue its march higher.

Rick Rouse
Rick@OptionsMentoring.com

Chipotle Mexican Grill (CMG, $83.80, up $2.14) missed earnings by a penny and it paid for in after-hours trading last night. The stock was down $9, or 10%, to $75. Other than missing by a penny, it was an earnings report that deserved an A+.

For 2Q, Chipotle reported an increase of 23% as the company earned $24.5 million, or 74 cents a share. Wall Street was looking for 75 cents. Chipotle also disappointed on the revenue side as they company reported $341 million while the Street was looking for $344 million.

Same-store sales were up 7% for the quarter and it expects more of the same for the rest of 2008. The company also said it plans to open 130 to 140 new restaurants during the year which shows that its brand continues to grow despite the tough economy. As consumers continue to change their spending habits to fight high everything prices, Chipotle has become the cheaper way to go out and have an incredibly good meal and at a cheap price. That seems to be working despite the increases in menu prices because they are getting more customers.

Of course, we had a short position in Chipotle when we bought the August 70 puts (CMGTN, $1.40, down $0.55) which were out-of-the-money. They still are but all we are looking at is a one or two-day trade. The after-hours action was a good indicator of where the stock is headed when the opening bell rings this morning. If Chipotle opens around $75, the puts could be worth $2.00-$2.50 which is all we are looking for. The puts were profiled at $1.60 in the blog so a 50% gain would be $2.40. If we can get an open on the puts right there or a little higher, set stops at $2.35-$2.40.

Again, you may have to watch the action a little bit today to get a good feel on where Chipotle may trade on Friday and I’ll try an update the situation later today in another blog. The magnet I was telling you about pulled Chipotle back in the $70’s, let’s just hope it holds when trading begins.

Rick Rouse
Rick@OptionsMentoring.com

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

It’s been a rough couple of days for Merck (MRK, $31.33, down $4.00). The stock followed Monday’s 6% decline with a 11% drop on Tuesday after lackluster earnings and some damaging information for the company’s cholesterol drug Vytorin.

On Monday when Merck was at $36, I mentioned that earnings were delayed and that pending news was due out concerning Vytorin. Merck came out later that day and said that researchers reported the drug was ineffective in stopping progression of a condition called “aortic stenosis”, or a small blockage of the heart’s aortic valve. That’s when the selling intensified.

You just had this feeling that it wasn’t going to be good news. I mentioned investors had bought the August 37.50 calls (MRKHU, $0.10, down $0.50) and the August 40 calls (MRKHH, $0.05, down $0.25) on Friday in anticipation of a good earnings report come Monday morning. Afterall, investors were expecting double-digit growth and there is a shift into Drug stocks right now, so I can see why we had heavy call volume on Friday.

When Monday came and I noticed that earnings were delayed, I started watching the volume in the August 35 puts (MRKTG, $3.80, up $2.65) and I mentioned they were the most active in the August put chain. They were selling for 85 cents at the time. Yeap, the percentage gain on that one comes out to 335% as of yesterday’s closing price.

Although the reaction or the sell-off is overdone, the puts may have ran their course and it would be wise to set stops at $3.40, which sets your stop at a 300% gain. Merck is another company that looks attractive at these levels if you only deal with stocks and it’s too early to even think about going long any call options. For the meantime though, enjoy the short position you have but make sure your exit points are in place.

Rick Rouse
Rick@OptionsMentoring.com

Yahoo (YHOO, $21.40, down $0.27) announced earnings after the closing bell yesterday and in after-hours trading the stock held up well. For Q2, the company reported earnings of $131 million, or $0.09 a share. This was a drop from $161 million, or $0.11 a share, in the year-earlier quarter. Wall Street was expecting $0.11-$0.12. Basically they missed by two or three pennies depending on who you talk with.

Some are saying the results were disappointing while others are saying Yahoo is getting a break because it could have been worse. The fact that the company did not change its full-year forecast is probably the silver lining that is holding the stock up.

That’s not really much to go on though. It’s amazing that Wall Street is so critical on some companies while giving others a kitchen pass. Yahoo gave a range so wide that you could drive a tank through it when it kept its full-year forecast in the $7.35 billion to $7.85 billion range, sorta.

The way this really went down was that Yahoo raised the bottom end of its previous revenue outlook to $7.35 billion but lowered its top end to $7.85 billion. The earlier forecast was even wider as it called for $7.2-$8 billion. How’s that for smoke-and-mirrors?

The wild card is Yahoo’s relationship with Google (GOOG, $477.11, up $8.31) which could add up to $800 million in revenue. But even that is still under regulatory review. Yahoo shareholders have suffered enough and their earnings report has more holes in it than a slice of swiss cheese. Still, the stock got some love and was up $0.59 to $21.99 in after-hours trading.

Rick Rouse
Rick@OptionsMentoring.com

You can always expect an extreme move in Apple’s (AAPL, $152.52, down $13.77) stock the day after an earnings announcement. Another thing you can expect is for Apple to beat Wall Street’s expectations — they have for eight straight quarters — and yesterday was no different.

The company reported earnings of $1.19 a share on revenue of $7.46 billion. Of course, Apple is famous for “sandbagging” their numbers, meaning they always forecast at the lower end of earnings. Cisco Systems (CSCO, $21.72, down $0.12) is the King of beating earnings by a penny but when it comes to Apple, it makes Cisco look like a Pawn. Wall Street was expecting earnings of $1.08 so Apple beat by $0.11.

The problem with Apple is that Wall Street no longer rewards the company for its outstanding results; instead it chooses to focus on what Apple says about the future. And Apple dropped a bomb when it said gross margins will dip to 31% for the current quarter, down from 34.8% for the quarter just ended. Although Apple said gross margins would still average 30% for 2009, the news has dropped the stock back to the $150 level.

The drop in gross margins will likely be caused by a drop in prices for the Mac. Apple shipped 2.5 million Macs in the quarter, a record, with desktop shipments growing faster than laptops. Some say an overhaul on the Macs are overdue and Apple did say they were introducing “state-of-the-art new products at prices our competitors can’t match”. It all makes sense with the back-to-school shopping season right around the corner.

Apple doesn’t deserve the sell-off it is getting and the August 150 puts (APVTJ, $5.35, up $2.25) are up 73% today. I don’t think Apple will fall much further so I would be hesitant to buy any puts right now. I do expect the stock to recover and perhaps it will when we get more details on these cool, new products Apple will be releasing.

Rick Rouse
Rick@OptionsMentoring.com

The Financial stocks continued their rally in the morning session on Monday but faded by the time the closing bell sounded. Some of the positions went on to double in price and that is really when they should have been sold, regardless of a stop. Sometimes you have to work your trades a little harder but for those of you who don’t have access to the market during business hours, stops are a beautiful thing.

Citigroup (C, $19.69, up $0.34) hit a high of $20.40 within the first hour of trading and the January 20 calls (CAD, $2.30, down $0.05) got to $2.60 before closing lower. They were profiled at $1.25 so stops should have been raised along the way. If you didn’t get out at higher prices then the $1.90 stop should still be in place.

Goldman Sachs (GS, $180.78, down $2.06) made it to $184 and change before fading. The January 260 calls (GPYAC, $1.05, down $0.20) opened at $1.18 and were automatically stopped out. The trade netted a 15% return, not bad for a few days of work.

Merrill Lynch (MER, $30.58, down $0.33) looked strong out of the gate but fell below $30 by the time the market was winding down. The January 35 calls (MERAG, $2.48, down $0.37) opened at $2.69, which fell between the two stop targets of $2.65-$2.75, made a run to $3.35, and hit both targets on the way back down. These calls were profiled at $1.90.

Wachovia (WB, $13.18, up $0.21) opened higher and was really strong but suffered the same fate as the others after hitting $14.66. The January 15 calls (WBAC, $2.15, up $0.22) still managed to close slightly higher but traded to a high of $2.90. They were profiled at $1.30 and $2.60 was the 100% exit point, especially with the company reporting earnings this morning before the opening bell. Wall Street is expecting a loss of $0.78 per share.

Rick Rouse
Rick@OptionsMentoring.com

Genentech (DNA, $93.88, up $12.06) rallied 15% on news that Swiss pharmaceutical giant Roche announced a $44 billion bid to buy the remaining 45% of the company that it does not own. The offer is for $89.00 a share but the market is clearly pricing in a higher bid. Here’s another developing story of an American company quite possibly getting acquired because of the weaker dollar. It would cost $1.59 to buy one euro with today’s exchange rate so it’s easy to see why Roche is making a play for Genentech.

We’ve been down this road before and it’s likely the offer will get raised. Genentech just reported outstanding earnings and the sales potential for its cancer treatment Avastin is enormous. For the quarter, the company reported a profit of $782 million, or $0.73 a share on revenue of $3.2 billion. Avastin made up $650 million of those sales which topped Wall Street’s expectations.

Avastin sales are burning up the track because of the increased use to treat breast cancer. The drug is also beng used to treat various stages of colon and lung cancer as well. If the company can expand on the approval for additional therapies then the stock will look super cheap at these levels and Roche knows it.

The two sides are having an “informal” meeting today and the early word is Roche will have to offer a higher price between $90 and $95 per share. I say Genentech is worth a least $125 but a deal will likely come in around $100. At least I would hope so. Genentech is sitting at all-time highs on the announcement but the stock was clearly headed for greener pastures without Roche’s full support or buyout offer.

The call option chains don’t list many calls over a 100 strike price but there was plenty of action in the pits. The August 95 calls (DWNHS, $1.50, up $1.25) soared 500% while the September 100 calls (DWNIT, $0.65, up $0.45) jumped 225%. It may be too late to get into any trades because the unknown will be what price Roche is really willing to pay. A $100 price would be nice and the August 95 could have a little juice left in them if that were the case. However, the options expire in three weeks and the trade does not give us good odds.

Rick Rouse
Rick@OptionsMentoring.com

Apple (AAPL, $162.93, down $2.22) reports earnings after the closing bell. Wall Street is expecting $1.08 a share. Mac sales are strong and this will likely be the key to where Apple trades on Tuesday. iPods will be steady and the new iPhone won’t add be adding anything to the bottom line in the quarterly numbers so what Apple says about the Mac could determine the direction of the stock.

Bank of America (BAC, $29.70, up $2.21) is helping keep the Financial sector rally alive for another day. The company reported earnings of $0.72 a share which blew the doors off Wall Street’s estimates of $0.53 a share.

Merck (MRK, $36.00, down $1.68) is expecting to report earnings of $0.83 a share after the bell today. There’s chatter at the water cooler that Merck could surprise Wall Street with a number of $0.86 a share. However, there’s a camp that believes Merck could come in at $0.79 a share. Either way, Merck is trading lower after delaying its numbers until after the bell. The company was going to report earning before the bell but delayed results so European researchers can present some data from a study of the company’s cholesterol drug Vytorin. The news is due out at 1PM EST.

Option traders were scooping up the August 37.50 calls (MRKHU, $1.00, down $0.50) and the August 40 calls (MRKHH, $0.35, down $0.15) on Friday as the July contracts were expiring but they are trading lower today. The August 35 puts (MRKTG, $0.85, up $0.35) are the most active in the August put chain.

Merck has been known to disappoint in the past and just last week the company settled a $4.85 billion agreement that will end 50,000 lawsuits from the Vioxx fiasco. Those who are bullish are taking on added risk with other storm clouds hanging over Merck but stranger things have happened. Too rich for my blood.

Rick Rouse
Rick@OptionsMentoring.com