Last night Starbucks Corporation (NASDAQ:SBUX) reported earnings and somewhat disappointed versus expectations. Guidance was also sub-par so it fell 7% in after-hours trading. So I was happy because I knew that I would want to go long it at the open. But alas for me, this morning it’s almost back to flat.
Traders overreacted to a bad quarter. This company is still on rails and perhaps the transition in leadership was a little more disruptive than should have been. The fundamental metrics are still solid. This is a company that is competitively priced from a price to earnings perspective, pays a dividend and has decent margins. So I will give it a pass on this quarter.
Today I want to set a bullish trade that will create income from what others feared. Last night’s dip was to $50.75 so I will place my risk just below that level.
Technically, SBUX stock trades in waves. But for the past few years, it has been trading inside a range between $52 per share and $58. So I will sell puts at the $50 mark and commit to owning the shares there if prices fall below it.
Click to EnlargeSBUX is a retailer that is not likely to be directly hurt by Amazon.com Inc. (NASDAQ:AMZN). The experience of getting coffee is a sacred ritual to most people. All my friends who go there won’t let it go for any reason.
They are not even willing to cut that expense during lean times. This is a base from which the company can grow.
Experts on Wall Street have a BUY rating on SBUX and the stock is now trading just above their lowest price target. The average PT is 15% higher than now so needless to say they excepted better things to come. If SBUX lingers this low for long we do risk getting a negative downgrade headline.
The Trade: Sell SBUX Apr 2018 $50 naked put and collect $1.50 to open. Here I have a 80% theoretical chance that I would retain maximum gains. But if price falls below my strike, then I own the shares and would suffer losses below $48.50.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell SBUX Apr 2018 $50/$45 bull put spread which has about the same odds of winning and would yield 15% on risk. Compare this with risking $54 per share at face value and without any room for error expect a rally profit.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need Starbucks stock to hold its support for the next few months. I am betting that the value of the stock will prevent sellers from pressing it down.
If they do, then I want to own the shares at a discount from here.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
