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Posts Tagged ‘SBUX’

A Post-Earnings Play on Starbucks

Monday, January 27th, 2014

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.

Terry

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

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.

A Post-Earnings Starbucks (SBUX) Play

Monday, January 28th, 2013

In our efforts to find  new and different option opportunities in this world of 5-year-low SPY option prices, we have been checking out pre-earnings-announcement strategies. 

Just prior to the earnings announcement, implied volatility (IV) of the options which expire just after the announcement escalates due to the uncertainty of what the earnings, sales, margins, or guidance might be. 

We have had some success buying calendar spreads at strikes below, near, and above the stock price in advance of an earnings announcement.  These spreads have a tremendous IV advantage (the options we sell have a higher IV, making them more “expensive” than the options we buy). 

Last week, we used this strategy on Starbucks (SBUX).  When we used just the calendar spreads, we managed to make 11% after commissions by selling the spreads the day after the announcement. This was out fourth consecutive week of making pre-earnings announcement gains. 

In addition to the calendar  spreads, we also bought some extra straddles or strangles (both puts and calls) which were designed to protect the entire portfolio against a loss in case the stock moved big-time after the announcement.  This time around, with SBUX edging up about $1.50 after the announcement, the straddle-strangle protection lost money when IV for those options plummeted after the announcement, and the portfolio that used both calendars and strangles broke even for the week. 

While studying the past history of SBUX we discovered an interesting pattern which is the subject of this week’s Idea of the Week. 

Terry

 A Post-Earnings Starbucks (SBUX) Play 

Last week SBUX rose $2.00 for the week, spurred higher by a good earnings report and the company re-affirming guidance.  We checked back over the last 13 times when SBUX rose by $2.00 or more in a week and learned that in the subsequent weeks, 10 times at some point during the week, SBUX traded at least $1.00 lower. 

With SBUX trading at $56.81, I will be buying Mar-13 57.5 puts, hopefully paying about $2.19, Friday’s closing ask price.  Immediately after making this purchase I will place an order to sell those puts for $.70 higher than what I paid for them (if the stock falls by $1.00 this put option should move $.70 higher).   

If this trade executes, I should make about 30% on my money after commissions. 

If the stock starts moving higher instead of lower, I will sell some Feb1-13 57.5 puts to reduce or eliminate possible losses (but I will be careful not to sell quite as many puts as I own long ones so that if the stock does fall, I should still make a gain). 

I expect to close out the positions by the end of the week unless the stock has edged up to being very close to $57.50 in which case I might sell the next Weekly series 57,5 puts because the time premium should be quite high (and I have six more weeks over which I can continue to  sell puts at this strike so that I can get back my initial $2.19 back, and more).

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