SBUX Analysis

Update 2/16/2016: The SBUX position reached half of its potential profit and I exited. Shares declined by 3.4% over 26 days, or a -47% annual rate. The options position produced a 100% yield on debit for a +1,404% annual rate.

---

The coffeehouse chain Starbucks Corp. (SBUX), headquartered in Seattle, Washington, publishes earnings on Thursday after the closing bell.

[SBUX in Wikipedia]

SBUX

I shall use the MAR series of options, which trades for the last time 57 days hence, on March 20.

Ranges

Implied volatility stands at 38%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. SBUX’s volatility stands in the 94th percentile of its most recent range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	66.76	75.11	61.15
Lower	50.06	41.71	55.67
Gain/loss	14.3%	28.6%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

SBUX has been in a downtrend since July 2014. The most recent leg to the downside began on Nov. 3, 2015.

Shares have risen the first trading day after each of the last four earnings announcements.

Brokers collectively give SBUX at 57% enthusiasm index, with 74% of 23 analysts making strong buy recommendations.

With a beta of 0.79, SBUX correlates with the S&P 500 although with movements that are somewhat narrower.

I shall construct a direction-neutral play.

Iron condor, short the $62.50 calls and long the $65 calls,
short the $52.50 puts and long the $50 puts,
sold for a credit and expiring March 21.
Probability of expiring out-of-the-money

MAR	Strike	OTM
Upper	62.5	75.5%
Lower	52.5	74.9%

The premium is $0.88, which is 35% of the width of the position’s wings. The stock at the time of entry was priced at $58.50.

The risk/reward ratio is 1.8:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $2.74, and the average was $1.49. Discarding the outliers gives a central tendency of $1.57.

Decision for My Account

I have entered a position on SBUX as described above.

-- Tim Bovee, Portland, Oregon, Jan. 21, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Alerts

Two social media feeds provide notification whenever something new is posted.

• On Twitter, Follow Tim Bovee: https://twitter.com/TimBovee
• On Facebook, Like Private Trader: https://www.facebook.com/PrivateTrader

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.