SBUX has successfully held its recent lows and is now back above its 50 day moving average. This means the out-of-the-money bearish structure is at serious risk of becoming a total loss, especially with the long holiday weekend ahead adding an extra day of decay. We’re going to sell the put spread for a loss and move on:
TRADE UPDATE – Sold to close SBUX (72.00) Jun21st 70/65 Put Spread at .50 for a .90 loss
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New Trade – Starbucks (SBUX): Crappuccino?
Last week SBUX did the impossible. They sold more coffee than Wall Street analysts expected in an unusually cold winter! The company reported fiscal Q2 eps that was above their prior guidance, but basically inline with street consensus, with a mildly improved outlook for fiscal 2014. Despite the large increase in coffee prices over the last 6 months, the company spoke to input costs for the balance of this year and have locked in many costs for 2015 that are only slightly above 2014. Heading into the print the company’s commentary on commodity costs and/or their ability to pass them through to customers was a big concern, so the raised outlook was a relief to investors, despite the relief rally being brief.
We have noted SBUX’s under-performance on numerous occasions since making new all time highs in November, with the stock down 15% from those levels, and down 10% in 2014. While the company appears to be executing well in a difficult sales environment while digesting and rolling out new product categories, the problem has less to do with their growth prospects and more to do with what investors are willing to pay for that expected growth. The stock trades 26.5x 2014 expected earning growth of 20%. Not horrible for a $53 billion market cap company, but certainly not cheap.
From a technical standpoint the chart is a borderline impending disaster, and needs to hold $70 in the near term or a move to $65 seems to be in the cards on broad market weakness or something company specific:
As expected since the earnings print, implied volatility has come in fairly hard, and is once again approaching the low end of the 2 year range:
With implied vol near a 2 year low, SBUX stock at an inflection point, and the recent strong fundamental news from earnings unable to instigate buying in the stock, I want to play for a breakdown below $70 in the next 6 weeks:
TRADE: SBUX ($70.58) Bought Jun21st 70/65 Put Spread for $1.40
-Bought 1 Jun21st 70 Put for 1.85
-Sold 1 Jun21st 65 Put at .45
Break-Even on Jun21st Expiration:
Profits: btwn 68.60 and 65 make up to 3.60, max gain of 3.60 at 65 or lower
Losses: btwn 68.60 and 70 lose up to 1.40, with max loss of 1.40 above 70
Rationale: Since options are cheap and SBUX looks to be on the precipice, technically speaking, we decided to just buy a put spread rather than fiddle around with a structure that might have less decay but less delta (put calendar or put fly). We’ll look to take this trade off for a double if SBUX breaks down in the coming weeks.