Starbucks (SBUX) options strategies for bulls and bears

Starbucks options strategies It’s not enough for Starbucks SBUX to be on every street corner in every metropolitan area; they now want to take over your grocery shelves! Thursday’s Wall Street Journal reported that the company is hard at work on plans to bring more of its products into the nation’s grocers.

Specifically, the chain wants to try selling in stores some of the same products that are available in its retail locations, including Via instant coffee and Tazo tea. (The Via brand alone could add about six cents per share to the company’s earnings, according to one analyst).

SBUX could use a fresh new idea to inspire investors; a year-long rally in the shares petered out in June and the shares have been drifting sideways ever since. What’s more, the shares are still a far cry from their all-time high of $40.01, notched in November 2006.

For investors interested in option strategies, we’ve outlined one moderately bullish and one bearish strategy below. Review the one that seems most appealing, depending on your opinion of SBUX stock and the company’s new strategy. These are not trading recommendations, merely examples of various strategies for educational purposes. The prices are taken as of Thursday’s close, when SBUX shares were trading at $24.04, down $0.46 on the day. For a full dissection of the strategies including profit/loss information, read on.

Bullish Option Strategy: Cash-Secured Put

Charts are created with the profit/loss calculator tool in a virtual trading account.

Starbucks has found technical support at the $24 level, which helped contain pullbacks in early July and earlier this month. Investors who think the new direction may help the company (or who expect limited downside in the shares) could explore the cash-secured put strategy. Note that this strategy is typically employed by those who would not mind holding the stock if they are assigned.

By selling the out-of-the-money October 24 put, a moderately bullish investor can collect a premium of $1.14. At expiration, if SBUX is still above this strike price, this premium is kept as the maximum profit.

On the flip side, if SBUX is trading below the strike at expiration, the put seller will likely be assigned and required to buy the shares. Setting aside the necessary cash for this purpose (or “securing” it) allows this trade to be executed without margin. In this case, the investor would allocate $2,286 for every put contract sold (the strike price minus the credit).

The maximum risk in this strategy is unlimited down to zero in the stock, or $22.86. The downside breakeven is also $22.86, giving the stock more than 5% downside before the short put will enter losing territory. This is why the strategy is moderately bullish rather than extremely so.

Starbucks (SBUX) cash-secured put

Bearish Option Strategy: Long Put “Broken Wing” Butterfly

Those in the moderately bearish camp when it comes to Starbucks could consider the put butterfly spread strategy. For an overall net debit of $1.93 per butterfly, the October 21/23/27 put butterfly could be purchased by buying one October 21 put, selling two October 23 puts, and buying one October 27 put.

If SBUX is trading right at the short strike – $23 – when these options expire on October 15, profit maxes out at $2.07, which is the widest span between strikes minus the premium paid. The maximum loss, however, is 100% of the $1.93 premium paid. Losses hit their maximum threshold only when SBUX is trading at or above $27 at expiration.

This spread has a “broken-wing” element to it, as the spread between strikes is not the same below and above the short strike. There is therefore only one breakeven price, of $25.07 (the higher-strike long put minus the debit paid). If SBUX is anywhere below this level at expiration, the butterfly will be profitable. Below the 21 strike, gains are limited to seven cents ($7 per lot), which is the maximum profit of $2.07– achieved at the 23 strike- minus the difference between the 23 and 21 strikes. One unfortunate consequence of the broken-wing nature of this trade is the margin requirement is greater than that of a straight butterfly.

Starbucks (SBUX) butterfly put spread