Starbucks Corporation (SBUX) is a long-term, proven performer. Its fundamentals are solid and it has a rosy future under its current leadership. Many of us are addicted to its products and are not likely to want to kick that habit anytime soon.
Technically, SBUX stock has suffered of late. 2016 has been underwhelming, with a 7% drop. But over the last twelve months SBUX is still up over 7%.
This includes a 5% drop since April. SBUX now sits at prior bounce levels. Furthermore, the magnitude of the fall is about the same size of the last three downfalls.
Click to Enlarge Most importantly, the fundamentals are solid and without a market-wide correction, SBUX should find footing and resume higher for the mid to long term. I want to capture that move. Instead of buying the stock here and opening the risk at current price, I will use options strategies to cautiously profit long Starbucks stock.
SBUX Stock Trades
Trade No. 1: Sell SBUX Jan $45 put. This is a bullish trade for which I collect $1 per contract. Ideally, I need SBUX stock to stay above $45 per share through mid January. Else I could be forced to buy the stock at $45 even if it falls lower. My break-even price is $44.
I sell naked puts only if I am willing and able to buy the stock at the level sold. If SBUX stock falls below my sold put, I would be put the stock. I would accumulate losses for as long as the stock falls. Alternatively, I could modify the trade to be a credit put spread. This would limit the downside risk.
Trade No. 2 — A Safer Alternative: Instead of selling naked puts, I sell a SBUX Jan $46.25/$45 credit put spread. This is also a bullish trade for which I collect 25 cents per contract. The potential yield is an impressive 18%. The theoretical chance of success is over 90%. For this trade to be successful, SBUX needs to stay above $46.25 per share through mid January.
Trade No. 3 — The Lotto: To add a little fun aspect to investing, I occasionally like to take lotto trades. Those are trades that cost pennies with a low chance of success but that would pay well if they hit. With some of the proceeds of sold puts, I buy SBUX July $60 call. This is also a bullish trade that only costs 13 cents per contract. If SBUX stock spikes this summer, I stand to profit above and beyond my premium from selling the puts.
It is important to note that markets in general are near all-time highs and on deteriorating fundamentals. This could create external risk to SBUX stock. Technically, SBUX also needs to hold current levels or risk tracing out the downside arrow on the chart above. I chose a put level to sell that should survive a normal correction.
I am not obliged to hold any of these trades into expiration. I can close any of them for partial gains or losses. After setting any trade, it is important to manage its odds of success.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
