A little more than a month ago on Dec 6th, I detailed a bullish near-term case for shares of Starbucks (SBUX):
the Nov jobs numbers suggest that fears of recessions and the affordability of $5 lattes have been pushed off a bit, and the stock’s cooling off this summer coincided with concerns about global growth, specifically in China, the potential for the U.S. to follow suit and valuation concerns.
So what’s the Trade? If I were inclined to play for an early 2020 re-test of $100, with short-dated options prices nearing 2019 lows, I might consider calls or calls spreads to define my risk.
The next identifiable catalyst for the stock will be its fiscal Q1 results on Jan 28th. I might consider a near the money strike like the $87.50 in January, that would expire before the earnings event and look to roll up and out on any strength above the strike… for instance:
BULLISH TRADE IDEA: SBUX ($86.25) BUY JAN 87.50 CALL FOR $1.50
Break-even on Jan expiration:
Profits above 89
Losses of up to 1.50 between 87.50 and 90 with max loss of 1.50 at or below 87.50
Rationale: this trade idea risks less than 2% of the stock price with a break-even up 3%. The options market is implying about a 33% chance that this trade is in the money on Jan expiration, in about 6 weeks,
I also detailed the idea on CNBC’s Options Action program on Dec 6th:
With just four trading days left it makes sense to consider how to manage this trade idea if you had not done anything with this call. On Dec 6th when shares of SBUX were $86.25, the Jan 87.50 calls cost $1.50, now with the stock at $91.55 those calls are worth about $4 for a $2.50 profit.
Here are the options the way I see it for trade management.
- Keep a close eye on it prior to this week’s expiration, and pull the trigger on selling to close and book the profit.
- Roll up and out to catch fiscal Q1 earnings the last week of Jan, this would entail selling to close the Jan 87.50 call and buying to open a higher strike call in Feb expiration that will catch their earnings which might be the catalyst to move the stock back towards the prior highs near $100.
As I just said in my prior post on trade management in AXP Jan calls, “no one ever went broke taking a profit, a wise man once said… but… playing with the house’s money, and if the market continues to ramp, and AXP (substitute SBUX) posts a beat and raise, then a breakout could be in the cards…
At this point, I think it makes sense to book some profit, but it also might make sense to use some of that profit to have upside exposure in the event the stock makes a run back towards $100, especially as the stock flits with technical resistance at $91.50:
Action: Sell to close 1 SBUX ($91.50) Jan 87.50 call at $4 for a $2.50 profit
Action: Buy to open 1 SBUX ($91.50) Feb 92,50 – 100 call spread for $1.75 (buying 1 Feb 92,50 call or 1.95 and selling 1 Feb 100 call at 30 cents), this new trade idea books 75 cents in profits, breaks-even at $94.25 and has profit potential of up to $5.75 between $94.25 and $100 with max gain above $100