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Here’s why traders are expecting a huge move when Chipotle reports earnings

Traders bearish ahead of Chipotle earnings

Chipotle shares are down 8 percent in the past week after reports of a Norovirus outbreak in a Virginia restaurant and mice sightings in Dallas sent investors fleeing from the stock.

According to Mike Khouw of Optimize Advisors, there has been a huge spike in unusual activity in the options market after the incidents. "We have seen four or five times the average daily volume most of those days, [and] probably two or three times the pre-scare volume [on Monday]."

The troubled burrito giant was finally starting to make a crucial turn after the E. coli drama in 2015, attempting to win back customers with new menu items and more promotion. However, the recent incidents have investors dodging the stock.

Chipotle will report second-quarter earnings after the market close on Tuesday, and traders are anticipating heavy volatility. "Most of the stocks that have been reporting this earnings season, the options market has been anticipating more muted moves than usual, but that's not the case for Chipotle," Khouw said Monday on CNBC's "Fast Money."

Chipotle is expected to move about 7 percent in either direction, which is notably higher than the 5.6 percent move over the past eight quarters.

"What is really interesting is that there is really not a clear consensus on the direction [on the trades]," Khouw explained. "It was bearish last week. Today though, it looks like we have both bulls and bears making bets on big moves by the end of the week … so expecting a lot of volatility in this stock going forward."

Chipotle shares were trading about 1.5 percent higher at the $345.12 range midday Tuesday.