SBUX: The Froth is Building in Starbucks Stock

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Starbucks Corporation (NASDAQ:SBUX) has been scorching hot since its mid-January earnings release. It’s been a top performer among its fellow Nasdaq Composite constituents and boasts a price chart that stacks up bullish on all time frames.

Starbucks stock SBUX covered callsIn early trading Monday SBUX stock reached yet another in a long line of all-time highs at $93.93. No doubt the bulls have set their sights on the $100 mark.

Despite an overwhelming amount of bullish evidence, skeptics would argue the stock has gotten a bit ahead of itself — overbought, in trader jargon. Including its earnings gap Starbucks stock is up 13% in the past month.

It’s also climbed well above the 50-day moving average, which usually indicates the stock is a bit overheated and at least due for some type of pause, if not an outright pullback.

While fading strong trends aren’t for the faint of heart, it can prove quite lucrative for those with who nail the timing.

What’s more, we can build a trade that profits even if SBUX stock stagnates in the coming weeks.

SBUX chart
Source: MachTrader

Adding neutral to bearish plays into your portfolio can provide some strategy diversification. Given the recent rise in stock prices its a good bet most traders are leaning heavily bullish. By tossing other types of directional bets into the mix you reduce your overall exposure providing some much-needed balance to an otherwise one-sided portfolio.

SBUX Option Calendars

Now that earnings is in the rear-view mirror the implied volatility of SBUX stock options has fallen to the lower end of its range. With options being offered on the cheap, long volatility plays like put calendars appear more attractive.

A put calendar spread consists of buying a long-term put while simultaneously selling a short-term put. To set the trade up slightly bearish on SBUX we will need to buy a higher strike put while selling a lower strike put.

Buy the Apr $95 put and sell the Mar $92.50 put for a net debit of $2.05 or better. The risk is limited to the initial $2.05 debit and will be lost only if we see a massive rise in SBUX towards the $105 level. To limit the loss, consider exiting the trade if SBUX breaks decisively above $98 or so.

The potential reward and breakeven levels for the spread are displayed in the following risk graph. The best case scenario is to have SBUX stock fall toward $92.50 by March expiration. While the maximum reward is north of $100, the odds of SBUX sitting right at $92.50 at expiration are slim. I suggest exiting at a profit around $50 if possible.

SBUX risk graph
Source: MachTrader

At the time of this writing Tyler Craig owned neutral positions on SBUX.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/sbux-the-froth-is-building-in-starbucks-stock/.

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