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Today, we are opening a bullish trade on Starbucks (NASDAQ:SBUX) as the stock retests short-term support. As you can see in the following chart, support in the $52-$53 range is holding following some mild selling last week, which has created an interesting entry opportunity.
Selling puts allows us to enter the position with a hedge while making some income, which puts us in a better position if there is some short-term volatility. Despite Monday’s trade-motivated rally, there are still significant risks in the market that justify a moderately cautious outlook.
Despite a careful outlook on the market, SBUX still appears to be undervalued. As we have pointed out before, the stock is cyclical by nature, and there were some concerns about same-store sales (as well as management changes) in June. However, earnings were strong in July, and we think the loyalty program is still underpriced.
The decline in commodity prices has kept margins from coming under pressure, but the U.S. dollar has been a little bit of a drag. With respect to the dollar, this could be very good timing for a new entry. The trade “deal” with Mexico should relieve some of the upward pressure on the dollar, which would make SBUX’s foreign profits more valuable. If the dollar continues to ease from here, the impact on SBUX’s earnings expectations will be material.
Sell to open the SBUX September 21st $52.50 Put (SBUX180921P00052500) for a minimum price of $0.62.
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