I am a coffee lover, and not only am I adding to my Green Mountain Coffee Roasters (GMRC) spreads discussed last week, I am adding two new spreads this week in Starbucks (SBUX). By betting on both these coffee companies, I end up not caring whether everyone is drinking coffee at home or at their favorite Starbucks café, just as long as they continue to enjoy the java.And as I sip away at my 4+ cup daily coffee allotment, I can feel I am helping my investments just a tiny little bit. I will feel so righteous. The coffee can only taste better.
A Post-Earnings Play on Starbucks
SBUX announced earnings last week, and they were pretty much in line with expectations. The stock moved a little higher and then fell back a bit along with everything else on Friday.
The company is doing quite well. Total sales rose almost 12%, same-store sales rose 5%, earnings were up 25%, and they were opening new stores at the rate of nearly 5 per day (417 for the quarter).
While all those numbers are impressive, the market seems a little concerned over the valuation. It is selling at 28 times earnings (23 times forward earnings). The stock has fallen nearly 10% from its high reached just after the last earnings announcement.
The stock has displayed a pattern of being fairly flat between announcement dates. With that in mind, it might be a good idea to buy some calendar spreads, some at a strike price just above its current stock price ($74.39) and some at a lower strike.
I will be buying SBUX 10 Apr-14 – Mar-14 75 call calendar spreads (natural price $.60, or $625 including commissions) and 5 Apr-14 – Mar-14 72.5 put calendar spreads (natural price $.53, or $278 including commissions) for a total investment of $903.
Here is what the risk profile graph looks like for when the March options expire on the 21st:
SBUX risk profile graph
If the stock stays flat, these spreads could just about double the investment in the 52 days I will have to wait. My break-even range extends about $3 in either direction. Any change less than $3 in either direction should result in a profit.
Since the stock has fallen so far from its high even though it seems to be doing very well, I don’t expect that any further weakness will be substantial. On the other hand, the valuation continues to be relatively high so I don’t see it moving dramatically higher either. It looks to me like a quiet period is the most likely scenario, and that is the ideal thing for a strategy of calendar spreads.
I will report back on the success of these spreads after the March expiration. I like my chances here.
Tags: Auto-Trade, Calendar Spreads, Calls, Credit Spreads, diagonal spreads, Earnings Announcement, Earnings Option Strategy, Earnings Play, implied volatility, Monthly Options, Portfolio, Profit, Puts, SBUX, Stocks vs. Stock Options, Terry's Tips, thinkorswim, Volatility