Call Options Or Put Options On Starbucks (SBUX)?

| August 15, 2012 | 0 Comments

SBUX OptionsStarbucks (SBUX) doesn’t need much of an introduction.  You probably drive by more than one of their coffee shops every day.  I know of six locations within a mile or two of my house!

The coffee and espresso retailer also has also branched out into consumer goods.  They sell packaged coffee beans, tea, Frappuccino beverages, and ice cream at grocery and convenience stores.

SBUX currently trades for $47.62 per share.  The shares are up more than 41% from the 52-week low of $33.62.  But the shares are down more than 22% from the 52-week high of $61.57.    

Is this an opportunity to buy call options on SBUX as it regains its mojo?  Or should you buy put options on SBUX as slowing growth drags the stock lower?

The bulls make a convincing argument…

SBUX is coming off a rough quarter.  They missed analysts’ earnings estimates.  And they were forced to cut their fourth quarter earnings guidance. 

Obviously, investors weren’t impressed. 

But here’s the thing…  Starbucks’ business is still growing.  In fact, SBUX has one of the best long term growth outlooks around.

SBUX is rapidly expanding the number of retail locations in Asia.  And their consumer products division is growing by leaps and bounds. 

Amazingly, earnings are expected to grow at nearly 20% per year over the next five years.  You just can’t find many companies with a growth outlook as compelling as SBUX.

At this price, SBUX has already priced in the bad quarter and the fourth quarter earnings forecast downgrade.  Now, investors are turning their attention back to the long term growth outlook.  And by all accounts, the long term growth story is still on track.

Put simply, the recent selloff looks like a good buying opportunity for long term investors.  As investors rush to grab these shares at a discount to where they were trading just a short time ago, it should fuel a nice rally in the stock.   

But the bears have a compelling case as well… 

There’s nothing worse than a growth stock that’s broken down. 

I’ve seen it time and time again.  Investors pile into a high growth stock as long as the uptrend holds.  They’ll bid up the stock of these market darlings like SBUX to ridiculous levels.

Then the uptrend breaks down and all hell breaks loose.  Investors pile out the stock like rats deserting a sinking ship.

But some of the investors don’t get out of the stock right away.  They don’t want to take a loss.  So they’ll hold onto it waiting for a chance to get out at a smaller loss or breakeven.      

Right now, anyone who bought the stock anytime from March to July is trapped in SBUX at a much higher price.  In terms of technical analysis, there are strong levels of resistance at $47.50, $50, and again at $55.

With so much selling pressure from the trapped investors, any rally is likely to be short lived.  We’ll likely see SBUX resume its downtrend after a few failed rallies.

If you think the bulls are right, take a look at buying the SBUX October 2012 $50 Call for around $1.32. 

If you think the bears are right, take a look at buying the SBUX October 2012 $45 Put for around $1.10.

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Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.