Looking at Cramer’s Bearish Take in Starbucks (SBUX)

In an episode of Mad Money last week, host Jim Cramer said that while he appreciates how Starbucks SBUX CEO Howard D. Schultz is running the company, he sees no dividend-yield support and doesn’t like the stock overall. While SBUX has been in a long-term uptrend since late 2008 (more than tripling in value since its November 2008 low), the shares’ upward momentum appears to have slowed of late. In Friday’s trading midday, the stock was little changed at $25.66.

Some investors may side with Cramer, expecting the tide to turn for the coffee giant, and others may be anticipating further upside (or may have the habit of going against whatever Mr. Cramer recommends). Either way, there are additional ways to invest in SBUX that do not involve shorting the shares or devoting the capital to buy shares outright. There are a number of options strategies, ranging from very conservative to extremely aggressive, that can cater to an investor whether he or she is screamingly bullish, moderately bearish, or just expects the underlying stock to trade in a range.

Two hypothetical options trades are described below. Remember, these are just examples, not recommendations, and be cognizant of your personal risk/reward parameters before executing any new trades.

*Prices given as of Friday afternoon

Bullish Option Strategy: Bull Call Spread

Think SBUX shares are merely resting and will return to their upward ways? Consider buying bull call spreads. The October 26/27 call spread is currently priced at 49 cents per share (buying the 26 call, selling the 27 call). If SBUX is trading above 27 (an advance of 5.2% from current levels), the maximum profit the spread buyer can make is 51 cents per spread. The maximum loss, meanwhile, is capped at 100% of the premium paid, or 49 cents (if SBUX is below 26 at expiration). Breakeven for this spread is $26.49; if SBUX is trading anywhere north of this level when October options expire on October 15, the spread will be profitable.

Profit/Loss of Starbucks (SBUX) bull call spread

Bearish Option Strategy: Long Put

Investors who agree with Cramer’s bearish outlook can go back to basics and buy long-term puts. The January 2011 25-strike put is currently priced at $3.70, which is also the maximum potential loss at expiration if the shares move against the investor. The maximum potential gain is theoretically $21.30 per put, but this would only be achieved in the unlikely event that SBUX plunges all the way to zero.

Breakeven at expiration is $21.30 as well. The shares need to be trading below this level on January 21 of next year for this put to be profitable. That’s a decline of 17%, so only serious bears need apply for this strategy. Of course, the put buyer can sell to close this position at any time after entering the trade (prior to expiration) in order to stop losses or collect profits.

Is Your Portfolio Thirsty for Starbucks?

Does Starbucks have a place in your long portfolio or are have you joined Cramer on the bearish side of the fence? And while you’re thinking about it, what’s your favorite beverage from the ubiquitous coffee spot?

Compare OptionsHouse rates for stock options with other brokers. New to options? See how your trade ideas would fare in a virtual trading account before committing any real money.

Photo Credit: Rudolf Schuba

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