Starbucks Corporation’s (NASDAQ:SBUX) future has come under fire of late. Most of those bearish arguments center around longs lines at Starbucks, and that’s where I think most are missing the point.
SBUX stock is well-managed with very few flubs over decades. Most of its clients are addicted to the ecosystem — to use some Wall Street jargon. Where I disagree with consensus is that the issue of customer throughput is actually a sign of strength.
Most other companies would love to be so lucky as to have the problem of too many people at the checkout counters. Let’s render this notion to its generic form: Company ABC, which has had a consistent growth record, is so successful that its clients have to endure lines at checkout during rush hours. To me that is the ultimate sign of successful brand loyalty.
Click to Enlarge Growth like SBUX stock has had is atypical and often comes with growing pains for extended periods of time … and that is a bullish bet over the long term in my book.
The trick is choosing proper entry points, and that is likely the source of most investor frustration. Technically, SBUX stock trades in waves, which I illustrate with yellow arcs on my chart. So most who chase trends tend to fall victim to the zigzag price action. They enter late then step out early on dips.
To solve this problem I use options, so instead of needing to time the purchase of Starbucks stock, I generate income from selling put options against clear, proven support levels. Case in point is when I recently shared a trade that generated income out of thin air.
SBUX Stock Trade Idea
The Bet: Sell the SBUX Oct $52.50 naked put and collect 75 cents per contract. This is a bullish trade that gives me a 90% certainty that I will keep the whole premium. I would accrue losses if price falls below $51.75 per share.
If I am not able to own the shares at $52.50, then I should not sell naked puts but sell a spread instead, which has a smaller risk profile.
The Alternate: Sell SBUX $52.50/$50 credit put spread where I have the same chance of success. This spread carries smaller risk yet still potentially yields 11% on it. Compare this with needing to risk $60 per share to buy the stock and having no room for error, then needing the stock to rally 11% to match the returns of the spread.
Usually I sell upside risk to balance my trade but in this case and with a 12% buffer, I am confident that I will be able to manage my risk against the short-term price gyrations in Starbucks stock. I could buy cheap sacrifice puts to withstand the next earnings event in July if needed.
Learn how to generate income from options here. 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.
