I don’t like risking earnings trades because too many factors can cause shares to move in the opposite direction you are playing. A good earnings report can be crushed if a company offers a weak outlook or cuts estimates. If you are long calls, these options usually take a massive haircut on disappointing news.
It is also hard to short bullish stocks — or stocks with little short interest — and Starbucks Corporation’s (SBUX) tremendous success story gives it the qualities of a stock that is hard to short.
I have done well with bullish SBUX option trades over the years but I’m a little hesitant in doing so this time around. Shares are down 6% and a rebound might be in store, but so could further weakness.
Shares are holding the 50-week moving average at $54.53, but face further risk to $50 (and possibly $45 and the 100-week moving average) on an earnings miss or lowered guidance. A rebound to $57.50-$60 could come on a blowout quarter, but that might be asking a lot.
The SBUX Stock Chart
The company will report earnings following Thursday’s close. Wall Street is looking for a profit of 45 cents a share on revenue of $5.39 billion.
The high estimates have Starbucks earning 46 cents a share on sales $5.55 billion. The low estimates are pegged at 44 cents a share on revenue of $5.22 billion. In other words, a beat or miss by a penny could headline Starbucks’ earnings announcement.
Starbucks has matched estimates in three of the past four quarters with a penny beat in between.
The SBUX Feb $55 puts (SBUX160219P00055000) were up a whopping 141% at one point in Wednesday’s session. These puts opened at $1.38 with a low of $1.24 and a high of $2.42. Obviously, these put options are up too much to chase.
The SBUX Feb $52.50 puts (SBUX160219P00052500) are also up more than 140% on Wednesday and could be targeted for further weakness. However, I just don’t feel comfortable chasing them, either.
As a contrarian trade, bullish traders can “gamble” on a rebound in the stock by watching the SBUX Feb $60 calls (SBUX160219C00060000). These calls were down in Wednesday’s trading. If SBUX trades higher into Thursday’s close, aggressive traders might want to consider them.
I will likely be watching on the sidelines when it comes to SBUX. I will, however, be interested in how Starbucks stock responds afterward, as we could see a good setup to go long (or short) once the dust settles into next week.
I hope, though, you didn’t stay on the sidelines with my recent Twitter (TWTR) Trade of the Day.
I profiled the TWTR Feb $18 puts (TWTR160219P00018000) at $1.03 and said they looked tempting to play continued weakness in the stock. Shares traded to a multi-year low this week, sending the options soaring for gains of more than 150% from this time last week.
If you bought the aforementioned TWTR puts, I would exit at least half the trade at current levels while setting a stop at $2.10.
The TWTR Feb $16 puts (TWTR160219P00016000) were the “cheaper” trade, as these options were trading around 51 cents going into the Jan. 11 open. These puts have returned a massive triple-digit gain of nearly 200% since then. These puts traded to a peak of $1.93 on TWTR’s low of $15.48.
Same deal here: Exit half the TWTR trade at current levels while setting a stop at $1.25.
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