Robust Starbucks Is Ripe for a Trade

by John Kmiecik | July 9, 2013 1:15 pm

Earning season is upon us, which can make non-earnings plays a little more venturesome. Here is a trade idea on a stock that has moved higher in front of its earnings announcement, and it can profit even if the momentum stalls.

Starbucks (SBUX — $68.29): Put Credit Spread

The trade: Sell the July 65/67.5 Put Credit Spread (selling the July 67.5 put and buying the July 65 put) for 40 cents or better.

The strategy: The maximum potential profit for this trade is 40 cents if SBUX is trading above $67.50 at July expiration. The maximum loss is $2.10 (2.50 – 0.40) if SBUX is trading below $65 at July expiration. Breakeven is $67.10 at expiration based on a credit of 40 cents.

The rationale: Starbucks has been nearing its July 25 earnings announcement by setting all-time highs right and left. SBUX already is up more than 25% year-to-date, and the company itself has been effective in growing its business in the U.S. and internationally, though there have been a few setbacks in Europe. The fact that coffee beans have been dropping in price[1] has not hurt the bottom line either.

There are a couple different ways to think about an options strategy on Starbucks.

The stock has been climbing and now might be a little extended, which makes a directional play seem like a little more adventurous option. With July option’s expiration occurring before the earnings announcement, selling a July credit spread is a viable option.

Click to Enlarge
Looking at an hourly chart of SBUX over the past 10 days, we can see that the stock has trended higher, usually making higher pivot highs and lows. The stock has a little pivot area around $68 which needs to act as support and keep the stock from moving lower, thus protecting the put spread.

If SBUX does continue to move higher, we can sit back, drink some Joe and collect our profits.

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

  1. coffee beans have been dropping in price:

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