Considering Our Options – $SBUX

by Enis July 3, 2014 10:39 am • Commentary

SBUX is trading almost exactly unchanged on the year after a strong 6 week rally from near $70 in late-May.  SBUX closed the year at $78.39 (red), and that level has acted as resistance in 2014, once in March, and also over the past 2 weeks:

SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

I bought the Jul19th 80/75/70 put butterfly in SBUX in mid-June for $2.15 when SBUX was trading near $77.  The structure is currently worth about $1.70 with SBUX a bit more than a dollar higher, which is right around the intrinsic value of the put butterfly (if the structure expired today, it would be worth $1.70).

SBUX reports earnings on July 24th, and there are no events between now and then, so no news catalyst to move the shares.  The bigger concern for me at the moment is the technical situation.  I feel comfortable hanging on to the position as long as SBUX remains below $79 (where the intrinsic value of the position is at least $1, with some additional time value in the $80 put), but if SBUX breaks out above that level, a move above $80 becomes more likely in my view, which would make my fly worthless.

At the moment, I plan on holding on to the position as long as SBUX remains below $79, and would be quick to take the trade off for a profit on any move to near the mid-June gap of $75.56.  If SBUX breaks above $79, I’ll likely suck it up and take my loss on this trade.




New Trade – $SBUX: Triple Shot Toppe?

Starbucks is trading at a 3 month high today after an upgrade from UBS.  The UBS analyst cited the following factors for the upgrade:

  • One of best long-term global growth opportunities among consumer multinationals given good sales growth, earnings visibility, and optionality around out-year initiatives
  • FY2015 consensus estimates now reflect higher coffee costs; more recent pullback in coffee may mitigate some fears for full year impact

The stock’s move today is likely catch up to the rest of the market, since the UBS analyst hardly noted any factors that were not already well known by Starbucks investors.  Even with today’s move, SBUX is still down 1.5% on the year.

One subscriber asked us about a potential 80/75/70 put fly in SBUX this afternoon, and taking a closer look, the chart certainly suggests that SBUX will have a tough time breaking either $80 to the upside or $70 to the downside without a significant stock-specific catalyst:

[caption id="attachment_41958" align="alignnone" width="600"]SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg SBUX daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

Moreover, the fact that the stock is still negative on the year makes me think that the stock is more likely to hang around $75 rather than $80, especially since there is no catalyst in the name until earnings in late July.

So a rangebound trade is our natural inclination given the technical setup and a quiet market.  The only drawback is that implied volatility in SBUX is at a 2 year low:

[caption id="attachment_41959" align="alignnone" width="600"]SBUX 30 day implied volatility, Courtesy of Bloomberg SBUX 30 day implied volatility, Courtesy of Bloomberg[/caption]

This situation looks quite similar to the one in Mastercard, where we executed an in-the-money put fly last week in this post.  In a quiet market, even though implied volatility is low, the rangebound trades often work well if there is no idiosyncratic news.

With SBUX, we’re going to enter a similar position, looking for continued trading between 72 and 78 over the next month:

TRADE:  SBUX ($77.09) Bought Jul19th 80/75/70 Put Butterfly for $2.15

-Bought 1 Jul19th 80 Put for 3.26

-Sold 2 Jul19th 75 Puts at 0.60 each or 1.20 total

-Bought 1 Jul19th 70 Put for 0.09

Break-Even on Jul19th Expiration:

Profits: btwn 72.15 and 77.85 make up to 2.90 with max gain of 2.90 at $75

Losses: btwn 70 & 72.15 lose up to 2.15, btwn 77.85 & 80 lose up to 2.15, below 70 and above 80 lose full 2.15.

Rationale:  Once again, this trade is more a decay trade than a directional position, though it will do better if SBUX moves towards $75 rather than towards $80 over the next couple of weeks.  If SBUX gets above $80 or below $70, we’ll likely take a loss on the position, but plan to hold on to it through the July 4th holiday otherwise.