Starbucks’s (SBUX) has hit a rough patch recently with the stock down 25% from its 52-week high.
SBUX stock is trading at a PE Ratio of 23.30 which is well below the 5-year average PE Ratio of 49.91.
Despite encountering some recent challenges, over the past decade, SBUX has demonstrated impressive growth, increasing revenues by an average of 9.23%, free cash flow by 7.68%, and earnings per share by 14.54%.
SBUX is rated as a Strong Buy according to 10 analysts with 1 Moderate Buy rating and 13 Hold ratings.
COMPANY DETAILS
Starbucks Corp. is a roaster and retailer of specialty coffee globally. Besides its fresh, rich-brewed coffees, the company's offerings include many complimentary food items and a selection of premium teas and other beverages, sold mainly through the company's retail stores.
The company's popular brands include Starbucks coffee, Teavana tea, Seattle's Best Coffee, La Boulange bakery products and Evolution Fresh juices.
Other than the company's own retail stores, it generates revenues through licensed stores, consumer packaged goods and foodservice operations.
The company receives royalties and license fees from the U.S. and international licensed stores.
Under its consumer packaged goods operations, Starbucks sells packed coffee and tea products as well as a variety of ready-to-drink beverages and single-serve coffee and tea products to grocery, warehouse clubs and specialty retail stores.
The company's latest reportable operating segments comprise North America, International and Channel Development.
SBUX BULL PUT SPREAD
Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.
Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.
As a reminder, a bull put spread is a bullish trade that also can benefit from a drop in implied volatility.
The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Implied volatility is currently sitting at 29.35% which gives SBUX and IV Percentile of 79% and an IV Rank of 76.28%.
When entering credit spreads such as a bull put spread, it’s better to look for a stock with a high implied volatility percentage.
To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.
If we go out to March next year, we could sell the March 21, 2025 put with a strike price of $80 and buy the $75 put would create a bull put spread.
This spread was trading yesterday for around $1.65. That means a trader selling this spread would receive $165 in option premium and would have a maximum risk of $335.
That represents a 49% return on risk between now and March 21 next year if SBUX stock remains above $80.
If SBUX stock closes below $75 on the expiration date the trade loses the full $335.
The breakeven point for the bull put spread is $78.35 which is calculated as $80 less the $1.65 option premium per contract.
That breakeven price is around 10% below yesterday’s closing price.
Conclusion And Risk Management
One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $165, so we could set a stop loss equal to the premium received, or a loss of around $165.
Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the short strike of $80..
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
