How traders are betting on a coffee comeback
04/21/17

Can a kaleidoscope concoction jolt a comatose coffee stock back to life? That’s what traders seem to be hoping.

Starbucks stock (NASDAQ: SBUX) has not moved much since late 2015 despite the S&P 500 soaring to new highs. But this week it’s back in the spotlight thanks to the Unicorn Frappuccino, a limited-availability beverage that seems to be stirring hopes of a pickup in business.

Stifel analyst Mark Astrachan thinks SBUX will ramp up its monthly comparable sales this spring, in part because of new drinks. (Who says you can’t get the color green by mixing pink and purple?) Astrachan upgraded the shares from “Hold” to “Buy” and raised his target price from $60 to $67.1

Some option traders seemed to see opportunity, too. In the largest single transaction in SBUX, a block of 12,000 28-April 61.50 calls was bought for $0.57 and a matching number of 28-April 63.50 calls was sold for $0.16. Known as a “vertical spread," here’s how the strategy works:

  • Owning calls fixes the price where investors can buy a security. In this case, they can buy SBUX shares for $61.50.
  • Selling calls obligates them to deliver the security if a certain level is reached. In this case, it’s $63.50.
  • They will collect $2 if SBUX closes at $63.50 or higher on expiration at the end of next week. (Buy for $61.50, sell for $63.50.)
  • They paid $0.41 net, which is the cost of the 61.50s minus the credit received from selling the 63.50s. That $2 potential return, divided by $0.41, implies a potential profit of 388 percent if the shares rise just 6 percent from their current level.
  • Breakeven is at $61.91 and the entire position will expire worthless if SBUX remains below $61.50.
  • Earnings are slated for next Thursday, April 27, so the spread could profit if the numbers are strong.
Starbucks (SBUX) 6-month chart

Source: OptionsHouse by E*TRADE

SBUX rose 1.76 percent to $60.08 yesterday, its highest close in almost a year. Overall options volume was more than double the average in the last month, with calls outnumbering puts by over 3 to 1.

The stock is trying to claw its way back from a slow period, which analysts partially attributed to problems with its mobile orders and loyalty programs.2 More recently, attention has turned to the potential for growth in China and newly installed CEO Kevin Johnson.3

Bottom line: SBUX has drifted for more than a year, but now traders are looking for the stock to get moving again.

 

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1. Benzinga.com: Stifel Upgrades Starbucks To Buy, Expects Comps To Hit 6%. 4/20/17. Investors.com: Starbucks Breaks Out To 1-Year High As 'Unicorn' Tastes Like Victory. 4/20/17. 

2. Reuters: Starbucks cafe sales growth falls short, shares fall. 4/21/16. Bank of America Merrill Lynch: Starbucks Corp: Another comp miss. 1/27/17.

3. The Seattle Times: New Starbucks CEO aims to build company that will last a century. 4/3/17. The Wall Street Journal: New Starbucks CEO Sees Growth in Suburbs, Midwest and Lunch. 4/3/17.