Starbucks Corporation (NASDAQ:SBUX) reported earnings last night and Wall Street is hating it. The stock fell 6% on the headline in spite of good results. This is my opportunity to reload a bullish trade similar to what I do every time we get a big dip in this uber bullish equity market.
Investors are fleeing SBUX stock this morning in spite of the fact that management delivered strong results and extended guidance forward. This is not concerning to me because the short-term reactions to earnings is always arbitrary regardless of quality. These events are binary in nature and more based on trader expectations. The buy/sell orders are not driven by quality therefore have no impact on the long-term facts of the stock.
I could buy SBUX on this opportunity and hope it rallies so I can profit. But we are in markets that are technically extended so that would require a lot of hopium. Although this should work out for the extreme long-term, I want results faster and more importantly, I need some room for error. So I will use SBUX options instead.
Today, I will set a trade that would create income out of thin air.
My thesis establishes me long Starbucks stock and I can tune out all the naysayers who find fault in its operations and/or valuations. I will create a big enough buffer from the current price that the stock can fall an additional 13% from here and I can still retain my maximum gains.
A few months ago, experts on Wall Street were worried about long lines at the check out counters. I challenged that notion then as it was a symptom of success. Now, critics are disappointed in the growth and margins in China.
To me, this is clearly an opportunity on two fronts. First, it’s a big dip in a quality company inside a bullish market that doesn’t allow for many dips. Secondly, SBUX management is a proven winner and I have faith that it will resolve whatever challenges they encountered this time around.
So I am confident that if I own SBUX stock at an additional 13% discount, I will be able to manage out of it for a profit.
Fundamentally, SBUX stock is not cheap, but it’s not bloated either. From a price-to-earnings ratio, it’s in line with Dunkin Brands Group Inc (NASDAQ:DNKN) and McDonald’s Corporation (NYSE:MCD). These other two stocks have out-performed SBUX by a mile, but I still see reasons for a catch-up trade.
Technically, there are important levels in play here. I see support just below this morning’s trade. This extends all the way to $52-per-share. Below that, it becomes somewhat tricky. The 2015 rally was fast and steep. It terminated around $50, so I would expect that to also be support.
How to Trade SBUX Stock
The bottom line is that my trade today is a bet that in this animal-spirited stock market, the bottom will hold in this quality global company.
The Bet: Sell the SBUX Jun $50 put and collect 60-cents-per-contract to open. I have an 85% theoretical chance that I retain maximum gains. Otherwise, I will have losses below $49.40.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Bet: Sell the SBUX Jun $50/$45 credit put spread where my risk is limited. Yet if the spread wins, it would deliver 10% in yield.
Today’s trade doesn’t need a rally to profit, although it would certainly benefit from one. I merely need SBUX stock to hold support for the next few months. I am betting that the value in the stock will prevent sellers from taking it too far. If they do, then I want to own the shares at a discount from here.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get Nicolas Chahine’s newsletter for free here. He 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.
