In the few weeks before a company makes its quarterly earnings announcement, option prices make some predictable changes and the stock usually edges up in advance of the announcement. There are several ways you can take advantage of these changes to pick up some nice trading profits using stock options. Today I would like to share some trades I placed today on Starbucks (SBUX).
Some Ways to Play the SBUX Earnings Announcement
SBUX is slated to announce earnings on April 21st. Implied Volatility (IV) for pre-announcement weeks is 20 and it pops up to 25 for the Apr4-15 series which expires just after the announcement. The next two weekly series also have an IV of 25 which is likely to fall to 20 after the announcement.
SBUX has a record of coming very close to meeting earnings expectations. For the four quarters, there has never been a difference of more than a penny between what the market expected from the announcement and the actual earnings figure. Consequently, the stock has not fluctuated very much after the announcement.
Many times, in the weeks or days leading up to the announcement, hope for a better-than-expected announcement often causes the stock to tick a little higher.
SBUX closed last week at $58.36. I think there is a good chance that it might drift up to the $60 as we head into the announcement week. There are several ways you could play the tendency for the stock to move higher just before that time. One way would be to leg into a calendar spread by buying a further-out 60 call and wait for the stock to move up before completing the short side. If it does move up, you would get the calendar spread at a very attractive price (possible even at a credit which means you would be assured of a gain no matter what happens to the stock after the announcement). The downside is the possibility that it does not move higher, and time starts eating away at your long call before you can complete the spread.
Today, with SBUX trading about $58.60, I placed an order to buy SBUX May1-16 calls. I paid $1.12 ($112 per contract) plus $1.25 commission at the rate paid by Terry’s Tips subscribers at thinkorswim (if you are paying more than this as commission rate, you might consider opening an account at this brokerage – see the offer below).
A second way to play it would be to buy a May1-16 – Apr-16 60 call calendar spread. This is the trade I made today:
Buy to Open 5 SBUX May1-16 60 calls (SBUX160506C69)
Sell to Open 5 SBUX Apr-16 60 calls (SBUX160415C60) for a debit of $.68 (buying a calendar)
The Apr-16 series expires in the week before the announcement, so you could roll into the higher-IV Apr4-16 series when it expires on April 15. An at-the-money call with a week of remaining life when IV is 25 is about $.80, so if you are lucky and the stock is trading near $60, you could sell the Apr4-16 60 calls for more than you paid for the original calendar, and you would still own a calendar with two weeks of remaining life.
A third way to play the expectation rise would be to buy a May1-16 – Apr4-16 60 calendar spread. This way you would be selling the high-IV series now rather than waiting. Here is the spread I placed today:
Buy to Open 10 SBUX May1-16 60 calls (SBUX160506C69)
Sell to Open 10 SBUX Apr4-16 60 calls (SBUX160422C60) for a debit of $.24 (buying a calendar)
If the stock ends up at $60 after the announcement, a two-week at-the-money call at an IV of 20 would be worth about $.60 so you could about double your money after commissions. Of course, you are betting that the stock does not make a big move after the announcement. Such a move is always possible even though SBUX does not have a history of big moves after announcing (average change 2.6%, or about $1.50). The attractive thing about this spread is that it costs so little that risk is quite limited. There will always be some value to a call with two weeks of remaining life, and $.24 isn’t much to have to cover.
I will report back to you on how these three trades ended up. Hopefully, we might find out which of the three choices works out. Most companies report earnings each quarter, and there will be lots of opportunities to use these trading ideas on other companies you might like.