Two things become apparent when you survey the aftermath of Friday’s liquidation. First, the price plunge was largely a tech sector affair. Second, any selling that did seep into other sectors — like consumer discretionaries, for instance — is providing some alluring pullback setups. Chief among the eye candy is Starbucks Corporation (NASDAQ:SBUX), which retreated to a potential support level and looks poised for an up move this week.
Let’s break down SBUX stock and identify the key levels to watch moving forward. Then we’ll dive into the derivatives market to see what type of option strategies make sense here.
We begin with the weekly chart, which shows Starbucks’ current wrestle with overhead resistance.
Over the past year, the stock has been in base building mode, oscillating between $63 and $53. It appeared as if it was going to break out, but alas, with last week’s down move, the attempt failed. SBUX ended the week with a bearish engulfing candle which does suggest a bit of short-term caution. But as long as the stock remains above its prior pivot of $59, this drop should be treated as a minor pullback and nothing more.
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With the 20-, 50-, and 200-week moving averages headed higher, the bulls still deserve the benefit of the doubt.
Their dominance is further backed by the oft-watched Relative Strength Index (RSI) indicator, which is used by chartists to measure momentum. The latest upswing in SBUX stock, which ended last week, was confirmed by a higher swing high in the RSI. This confirmation signal confirms the stock’s weekly uptrend is, in fact, increasing in momentum.
And that makes it all the more attractive to buy the current dip.
Drilling down to the daily chart reveals SBUX’s ongoing retreat in greater detail.
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Last week’s five-day dip carried the stock to its rising 20-day moving average. The $62 zone is also a previous resistance level. And if the principle of polarity holds true, we could see this old resistance become new support.
How to Trade SBUX Stock Here
In sizing up the options market, our primary concern is whether options are cheap or expensive. In the former case, we lean toward long premium strategies. And in the latter case, we prefer short premium strategies.
The implied volatility rank (aka IV rank) is my weapon of choice for making this determination. It measures the current volatility level as a percentage of its one year range. A reading below the 25% percentile is considered low, while anything above 50% is considered high.
Right now, Starbucks stock is definitely priced on the lower end of the spectrum. Its IV rank is 16.6% and supports a long call or call spread play. If you’re looking for a quicker trade, try buying the Jul $62.50 calls if SBUX pops above Friday’s high.
Traders interested in a more conservative and longer-term approach could buy the Aug $60/$65 call spread. Currently it’s priced at $2.53, but will be more expensive by the time the setup triggers.
Like the long call trade idea, I suggest waiting until SBUX rises above Friday’s high. There’s no sense in jumping in until the pullback in Starbucks ends and a new advance takes root.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
