Chipotle’s latest health scare caught traders completely off-guard (CMG)

Reuters / Brendan McDermid

• Chipotle’s stock dropped on Wednesday amid reports that another one of its stores could be tied to an illness outbreak.
• Traders were woefully unprepared for the selloff, with downside hedges sitting at their lowest level in a decade before the news.

As if Chipotle‘s latest health scare wasn’t bad enough for those who own the company’s stock — which dropped as much as 4.6% — it also appears that traders were blindsided by the latest selloff.

This can be seen through a measure of downside hedges, which sat at a historically low level heading into Wednesday’s decline. Traders were paying the lowest premium in at least 10 years to protect against a decline in Chipotle’s stock, relative to bets on an increase, according to Bloomberg data.

Traders were the least hedged in a decade against a 10% decline in Chipotle’s stock, prior to the company’s latest health scare.Business Insider / Joe Ciolli, data from Bloomberg

In addition, short interest on Chipotle — a measure of bets that the stock will fall — declined by $836,000, or roughly 14%, in the two months leading up to the Wednesday’s scare, according to data compiled by financial analytics firm S3 Partners. That implies investors were getting increasingly confident about the company’s upside potential before this latest patch of weakness.

It’s a tough break for Chipotle investors, who likely thought the stock had nowhere to go but up after hitting a five-year low in October. The company’s share price had been cut almost in half since December 2015, when an E. coli outbreak sickened 80 students at Boston College. Chipotle also dealt with a norovirus scare in July. And shares had been showing signs of life of late, rebounding 17% from their 2017 low through Tuesday.

These latest developments are sure to make stock traders even more wary of Chipotle’s stock going forward, considering the now-everpresent threat of yet another outbreak taking a bite out of shares. At the very least, based on how quickly and aggressively health scares have hurt Chipotle up to this point, one would think those continuing to hold the stock would at least buy some hedges.

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