Starbucks Corporation (NASDAQ:SBUX) has its fans on Wall Street but they seem to sporadically disappear. The chart shows how it tends to periodically fall in droves. I too am a fan of the Starbucks stock. I believe that SBUX management team is a proven performer under great leadership.
Fundamentally they don’t have an extraneous SBUX-centric issues. So for the mid term, it should trade with the market. So this makes trading SBUX stock on the long side a matter of timing. For that, I have to consider the market in general not just the SBUX stock itself.
Today traders fled names that were starts as if they are now lepers. Consider the 2% to 5% drops in “FANGs” — Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Apple Inc. (NASDAQ:AAPL) also fell 2%. This on a day where the small caps are rallying 1% or more.
Today, Starbucks stock is fairing much better than the aforementioned. Technically it’s at a pivot level that was a failure point in early September. Prior to that, the same level had served as support about 12 months. $55 per share area is important. Onus is now on the bulls to prove that they can retake the level so they can use it as support once more. Else, it could be seen as forward resistance.
Luckily Starbucks options offer me hundreds of ways so I don’t simply buy call options and hope they work out. Instead, I will sell risk to generate income. The trick is to find levels that I trust will hold in a downturn. My last few trades on SBUX using similar strategies have been home runs except for one “push” lotto style bet. Today I want to target income generation through a meander trade.
The Trade — The Bet: Sell the SBUX Dec. 9 $50/$49 credit put spread. This is a bullish trade for which I collect 14 cents per contract to open. This leaves me with a 7% buffer from current price and a 85% theoretical chance of success. If successful I stand to generate 16% yield on money risked.
Usually I like to hedge my bet by doing the opposite on the call side. The following is an optional opposing side to this trade.
Click to Enlarge The Hedge — Optional: Sell the SBUX Dec. 9 $56.50/$57.50 credit call spread. This is a bearish trade for which I collect 11 cents per contract to open. This leaves me with only a 5.5% buffer from current price and only a 78% theoretical chance of success.
Taking both trades would put me in a sold iron condor, which if successful yields 30% on money risked. Ideally, I need SBUX stock to stay between $50 and $56.50 per share through my expiration dates.
I am not required to hold my positions through to expiration. I can close any options trade at any time for partial gains or losses at any time.
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.
