I am a long-time fan of Starbucks Corporation (NASDAQ:SBUX) stock. The company’s leadership exudes class and command over their industry. We rarely see sustained miscues. There have been recent complaints from equity expert with regards to long lines. In my book, having too many clients is an okay problem to have. But Wall Street hates SBUX stock these days and I want to capitalize on this.
While I enjoy my daily coffee, I am not a Starbucks client. On the other hand most of my friends won’t start their day without their daily Vente cup’O Joe from SBUX. This is to say that the business model is solid even without my personal contribution. They have an ecosystem hooking their clients a la Apple Inc. (NASDAQ:AAPL). This is a base behind which they can fix any temporary throughput issue.
Technically, SBUX stock usually trades in a choppy manner, making it difficult to time. So instead of trading the stock itself I use options where I can slow the action down so I don’t have to be so precise with my timing. Case in point is this trade that delivered profits fast.
Click to Enlarge Of late, price has been in a massive slide. Since the high in early June, it has had an official correction, thereby shaking a lot of weak hands out of their positions. Now Starbucks stock is approaching a consolidation zone that should be more difficult to lose, meaning the bears need to work extra hard from here to continue the slide.
Nevertheless, falling knives are scary and catching them could be hazardous. I only do it on solid fundamentals where the bottom is not a potential abyss. Most traders wait out looking for a clear bottom. But as we all know, they don’t ring bells at tops or bottoms. Through research and homework, I can gather enough conviction to call my own troughs.
Fundamentally, SBUX is not cheap but it’s not outrageously bloated either, so I am willing to add to longs after this 10% dip. No I will not buy the shares in the open market. I will instead sell risk below strong support levels.
I have to acknowledge that in addition to the valuation risk, there is the risk of disappointment. Most analysts rate the SBUX stock as a buy or outperform, thereby raising the chances of downgrades especially if equity markets in general weaken.
SBUX Stock Trade Idea
The Trade: Sell the Jun 2018 SBUX $45 put and collect $1.25 to open. This is a bullish trade with a 90% certainty of achieving maximum gains. But I would losses if price falls below $43.75 per share.
For those who don’t want to own the shares at $45 I would use credit spreads instead. There the risk is more finite.
The Safer Trade: Sell SBUX Jun 2018 $45/$40 bull put spreads where I have about the same chance of success and yield 11%.
Compare this with needing to risk $58 to buy the shares at face value with zero room for error, then hope that we rally just to match the performance of the spreads.
Since I built myself a 22% buffer from current price, I feel confident that I can manage my risk against short term price gyrations. So I will not balance the trade by selling credit calls spreads in SBUX stock.
Investing always carries risk regardless of how careful I am, so I never risk more than I am willing to lose.
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.
