from the desk of Dr. Terry F Allen

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Starbucks (SBUX) is Stepping Higher

SBUX received an upgrade and price target increase from Wedbush on Friday. The analyst believes the coffee purveyor will exceed its 2021 earnings-per-share range as it better adapts to the pandemic environment with lower drive-thru wait times. Moreover, the company is positioning for a post-COVID world with an enhanced menu that should leverage its strength in China and the U.S.

Despite the endorsement, the stock dropped more than 1% to log its third straight losing day after hitting an all-time high on Tuesday. But the intermediate-term pattern shows a series of higher highs and lows for the past three months. If this pattern holds, the current decline should find a bottom in the 104-105 area, which is also the site of the 50-day moving average.

SBUX Chart March 2021

SBUX Chart March 2021

If you agree that SBUX’s stairstep uptrend will continue, consider the following trade that relies on the stock remaining above $105 through expiration in four weeks.

Buy to Open SBUX 16Apr21 100 Put (SBUX210416P100)
Sell to Open SBUX 16Apr21 105 Put (SBUX210416P105) for a credit of $1.35 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when SBUX was trading at $106.34. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $133.70. This reduces your buying power by $500 and makes your investment $366.30 ($500 – $133.70).  If SBUX closes above $105 on April 16, both options will expire worthless, and your return on the spread would be 37% ($133.70 / $366.30).

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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