Starbucks Corporation (NASDAQ:SBUX) is one retailer that is not likely to be run over by Amazon.com, Inc. (NASDAQ:AMZN). We are addicted to caffeine and we love buying it daily at the coffee shop. This is not likely to change anytime soon. So SBUX stock has a baseline from which the company can continue to execute its plans without any major hiccups.
I have been a fan of SBUX stock for a long while and I like to catch it when it falls. But in this uber-bullish equity market, dips are rare so I am left to chase stocks for performance. This is dangerous because markets are at all-time-highs and most experts are on edge because of how long we’ve been here.
How to Trade SBUX Stock
So, today, I want to go long SBUX stock, but with caution. Instead of risking $58 to buy the shares, I want to generate income, but leave room for error. The idea is to sell downside risk against proven support and let time do the rest. But if the price falls below it, then I would own the shares.
For such a consistent company as an operator, Starbucks stock is too violent. Case in point is the period between its July and November earnings report: Investors sold it down 10% only to make a full recovery and then some.
Buying shares at these altitudes has its risks. Above $60, SBUX stock has a zone of resistance but those also offer opportunities.
When a stock sets higher lows pushing against a neckline of resistance and the bulls prevail by breaking it, then they tend to overshoot higher. But this hasn’t happened yet, so if I buy the shares now, I could be anticipating it too soon. However, my trade set does not need a rally to win, so I am willing to risk being too early because I have confidence that support will hold.
Fundamentally, SBUX is not dirt cheap, but it’s not bloated either. It is a fairly priced retailer with no serious issues.
There are critics who warn of its long lines at the registers, but that to me is an asset not a detriment. Having too many clients in stores is a great problem to have. I anticipate management to continue to excel regardless of who is at the helm.
The Bullish Trade: Sell the SBUX Apr 2018 $52.50 naked put for 70 cents to open. This leaves me with a 10% buffer and an 80% theoretical chance of success. I could accrues losses below $51.80.
Since SBUX has a habit of temporarily falling on earnings reports, I want to hedge my trade with a another shorter-dated one.
The Hedge – Optional: Buy the SBUX Feb 2018 $52.50/$50 debit put spread for 15 cents. This is a bearish trade that would benefit from a dip in price. I am not required to hold either trades through expiration. I can close either at any time.
Taking both trades results in a net credit, so I am a winner already. As long as price stays above my bullish bet, any premium I recover from closing the hedge would be incremental profits.
Ultimately, 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.
