Starbucks hasn't really participated in the latest rally. It's been trading back below its 200-day line for a few weeks and relative strength just keeps getting worse. But some of the recent breadth improvement has come from beaten down stocks. If Starbucks stock decides to join the rally, it could shoot higher in a short space of time. Here's a way to get bullish exposure without risking too much capital using a bull call spread. This might be a good idea given the extended market.
Getting Starbucks Stock Exposure For Less
A bull call spread is created through buying a call and then selling a call further out of the money. Selling the further out-of-the-money call reduces the cost of the trade, putting less capital at risk. But it also limits the upside.
Going out to the February expiration for Starbucks stock, a 100-strike call option traded around $2.30 this morning. The further-out 105 call was around $1.
Buying the 100 call and selling the 105 call creates a bull call spread. The difference in premiums of $1.30 is the cost of the trade. With 100 shares per contract, that's $130 out of your pocket as opposed to $9,614 that it would cost for 100 shares of Starbucks stock outright.
Lower Cost But Lower Profit Potential
What about profit potential? The maximum potential profit for this bull call spread would be $370 (difference in strike prices, multiplied by 100 less the premium paid). In getting the lower cost, you are giving up profit potential. For ownership of Starbucks stock, the profit potential is unlimited.
On the risk side, a bull call spread is a risk-defined strategy. That means you know your worst-case scenario ahead of time. If SBUX stock closes below 100 on Feb. 16, the trade loses the roughly $130 premium paid. No matter how far down Starbucks stock goes, you don't lose more than you paid.
In a similar manner, no matter how high SBUX stock might go, the most the trade profits is $370. While limited profit potential, a 35% return on risk isn't bad for a couple months' time.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case would equal 101.30.
Managing The Trade
In terms of trade management, if the stock dropped below 95, I would consider closing early for a loss.
According to the IBD Stock Checkup, SBUX stock is ranked number 30 in its group and has a Composite Rating of 48, an EPS Rating of 88 and a Relative Strength Rating of 34.
According to the IBD Stock Checkup, Starbucks stock is ranked No. 30 in its industry group and has a Composite Rating of 48, an EPS Rating of 88 and a Relative Strength Rating of 34. It's definitely been out of favor.
Starbucks stock is due to report earnings in early February, so this trade has earnings risk if held until then.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
