Updates – SBUX, JNJ: Fighting the Resistance

by CC March 9, 2017 12:51 pm • Trade Updates

We wanted to update two trade ideas that are going different directions (one doing well, one not so much). We targeted both stocks after they seemingly failed at resistance. One did indeed prove to be a failure, the other shook it off and has continued higher.

The first to discuss is Starbucks (SBUX). Just a few days ago we highlighted a rejection at its 3 month downtrend. We detailed an idea to position for continued selling from that level. Here was the trade idea, from March 5th:

SBUX ($56.75) Buy the March/May 55 put calendar for $1.00
  • Sell 1 March 55 put at .20
  • Buy 1 May 55 put for 1.20

With the stock now near 55, this trade idea is worth 1.30 vs the initial 1.00 paid. It’s at an important spot however, as right now the trade is delta neutral at the 55 strike. A move below 55 and the March puts are in the money, and the trade actually becomes long deltas (until they expire). What that means is we’ll have to be careful here as that was not our intention. At 55 the trade is perfect for now. Below that and we risk missing out on the move due to the short March puts. We’ll see how the stock holds up at this level. At some point we’ll look to close the March short puts and roll them out and down to continue the bearish position and hopefully find more profits. We’ll update when we do.

The next stock to look at is Johnson & Johnson (JNJ). When the stock was 122 and having just seemingly found resistance at its post election high we detailed a hedge for longs, or outright bearish idea as a trade idea. It was a simple put purchase. Here it was, from Feb 24th:

bearish/ hedge

Buy JNJ ($122) April 120 put for 1.50

JNJ barely blinked at the post election high and is now testing its all time high near 126. With the stock now 125.60 the April 120 put is worth about .60. Unfortunately, what we though may serve as resistance may now become support. And even if this breakout attempt fails it’s unlikely we’d see any sharp move to 120 or below, 122 seems much more likely at this point. Therefore it makes sense to be disciplined and close this one for a loss and not be left with a lottery ticket. For those looking at this as a hedge, it makes sense to close and look out a little, perhaps the June 120/110 put spread .