Order Up a Starbucks Spread

Starbucks
(SBUX) posted a solid earnings report on Tuesday, easily beating both top- and
bottom-line expectations. Year-over-year sales and earnings comparisons were
ridiculously high, as SBUX was one of the hardest-hit businesses during the
depths of last year’s pandemic-rocked economy. But the company grew sales from
two years ago and blew out analyst estimates. To top it off, SBUX raised sales
and earnings guidance for FY21.

The
market did not react well to the report, however, as the stock fell 3.6%
through the end of the week. This could be due to the company reporting
increased wage and inflation pressure. But analysts were undeterred. While
there were no upgrades, price targets were raised across the board, with some
reaching as high as $145 (the stock closed at $121.43 on Friday). The average
price target is above $128.

On the charts, the stock’s drop pulled it down to its rising 20-day moving average. This trendline supported a pullback in mid-July and has not allowed a daily close below it in more than a month. Note that the short put of our credit spread trade is right at the 20-day.

If
you agree that SBUX will stay above its 20-day moving average (blue line in
chart), consider the following trade that relies on the stock remaining above
120 (red line in chart) through expiration in seven weeks.

Buy
to Open SBUX 17Sep 115 put (SBUX210917P115)
Sell to Open SBUX 17Sep
120 put (SBUX210917120) for a credit of $1.60 (selling a vertical)

This
credit is $0.02 less than the mid-point
of the option spread when SBUX was trading at $121.43. 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 $158.70. This
trade reduces your buying power by $500 and makes your net investment $341.30
($500 – $158.70).  If SBUX closes above
$120 on September 17, both options will expire worthless
and your return on the spread would be 46% ($158.70 / $341.30).

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