There is no doubt that Starbucks Corporation (SBUX) is the poster child for the global love for coffee, but on Tuesday, SBUX stock was hit hard on a downgrade.
My initial reaction? Catch the falling knife. But first, I need to make sure that this knife has a long handle allowing for a relatively safe trade that won’t cost me a few fingers.
Fundamentally, Starbucks management is beyond reproach. SBUX CEO Howard Schultz is well-respected and his guidance is regarded as a long-term winner. I see no risk of a serious misstep.
Click to Enlarge I can see more potential downside on the technical front, however, so I want to leave room for error.
So, avoid buying SBUX and risking money at these prices where an immediate loss is highly likely. Instead, look to the options markets to sell puts for much lower than Starbucks’ current stock price.
How to Trade Starbucks (SBUX) Stock
Trade: Sell Jan 2017 SBUX $50 put and collect $2 per contract. Selling puts is a risky bullish trade, so only do it if you’re able and willing to buy the stock at the strike price sold. The breakeven point is $48 per share. To profit, SBUX must close higher than $50 per share by mid-January 2017.
Earlier I said that I like to leave room for error, and this trade gives me another 15% downside buffer from current prices. This makes this trade a relatively safe way to catch a falling knife.
And while not all knives are worth catching, Starbucks is worthy of a try on a seriously down day.
Note that there are many experts who expect SBUX to deliver disappointing results, but I feel that this week’s moves could have priced in any near-term disappointments.
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.
