Starbucks Still a Hot Commodity

by John Kmiecik | January 28, 2013 8:19 am

It’s that time of year when retailers find out how bad or how good they did over the holiday season. So far, it seems consumers stayed away form many luxury retailers and even some that are considered to be affordable.

However, this trade idea focuses on a company that many consumers still consider a must[1] — despite the expense.

Starbucks (NASDAQ:SBUX – $56.81): Long Calls

The trade: Buy the March 55 calls for $2.70 or less.

The strategy: The long call strategy is generally used for a bullish outlook. The trade can profit if the stock rises and the call premium increases as the SBUX option moves more and more in-the-money (ITM). Maximum profit is unlimited because SBUX can continue to rise, and the maximum loss is $2.70 or whatever was paid if SBUX finishes below $55 at March expiration. Breakeven is $57.70 based on a cost of $2.70 at expiration.

The rationale: It seems like Starbucks posts great earnings almost every quarter. The company has posted 12 consecutive quarters of same-store sales growth of at least 5%. It seems no matter how tough the economy is, people still need their cup of coffee. Starbucks continues to look to expand; the company has plans to open another 600 new stores this year alone.

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Technically, SBUX gapped up after its earnings announcement last week. But if we look a little deeper, we can see the significance of that gap.

The stock gapped out of a neutral base and cleared a prior pivot high at $56, which usually is a bullish sign. The stock has some minor resistance around $58, which makes that area a possible first target. Proceed with caution if Starbucks closes once again below the $56 level.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

  1. many consumers still consider a must:

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