When our Starbucks (NASDAQ:SBUX) September 20th $94 Put Write expired in the money, we happily took possession of the shares of SBUX, knowing we could sell covered calls against the stock for additional income.
But just as people are shifting from pumpkin spice to peppermint in their coffee, we are shifting our approach to SBUX. We had been selling covered calls with a strike price around $85, but now that the stock is rising again, we think higher strikes are the best strategy.
We’ve been getting great returns and generating consistent income from SBUX all year, and we want to continue doing so through the rest of 2019. That means we don’t want to have our shares called away from us. To ensure this doesn’t happen, we think any covered call we sell against the stock needs to provide a little breathing room.
Why did SBUX Fall and Why is it Rising Now?
SBUX was a Wall Street darling earlier this year when traders were favoring consumer staples stocks. Stocks like SBUX seemed like a more stable investment than other stocks that might get caught up in trade war antics.
That all changed this fall when trade tensions between the United States and China looked like they were starting to ease. Traders started moving money away from more stable stocks and into more aggressive stocks to take advantage of the surging S&P 500.
However, as trade tensions are flaring once again, traders appear to be shifting some of their focus back to conservative consumer staples stocks like SBUX. We expect this trend to continue into 2020.
To make sure we don’t get caught flat-footed if this trend continues, we need to make sure the strike price on our SBUX covered calls are high enough that the stock won’t jump past it during this bullishness.
Breaking Down-Trending Resistance
If you look at the chart below, you can see SBUX has jumped above down-trending resistance at around $85. The recent bullishness in the sector may push the stock further out of its downward channel, which is ultimately good. We are holding the stock and want to see its price go up. But as mentioned before, we don’t want to be called out of the stock if our covered call expires in the money.
Daily Chart of Starbucks (SBUX) — Chart Source: TradingView
When selling a covered call on SBUX, it is probably best to avoid committing to the trade beyond early January. After all, the holiday season is a big time for the company, and we’ll want to re-evaluate the position before it has a chance to jump even higher.
It’s difficult to pick a short-term resistance level to use as a strike price because the stock’s main resistance was trending down, so selling covered calls with a strike set at $88, a level the stock hasn’t hit since October, seems like the wisest move.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.