Calls or Puts on Starbucks Coffee House / Bar?

While Starbucks Corp.’s (SBUX) decision to sell beer and wine has captivated the financial media this week, the company is scheduled to add to the drama when it releases its first-quarter earnings report after the close this afternoon. Currently, Wall Street is expecting the coffee king to post a profit of 49 cents per share, up 6.7% from a year ago, on revenue of $3.29 billion.

The whisper number arrives a penny higher at earnings of 50 cents per share.

Historically, Starbucks has had no trouble topping Wall Street‘s expectations. In fact, the company has bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of more than 8%.

Speaking of Wall Street’s expectations, analysts are currently quite bullish on Starbucks’ prospects. According to data from Thomson/First Call, the brokerage bunch has doled out 18 Buys, nine Holds, and only one Sell rating. Furthermore, Oppenheimer upgraded SBUX to Outperform from Perform on Wednesday. There is still room for improvement, however, as the consensus 12-month price target of $51 rests a mere 6.7% above the stock’s close at $47.77 yesterday.

Meanwhile, expectations appear to be low among options traders. For instance, February put open interest totals 22,062 contracts, compared to call open interest of 15,424 contracts. The result is a bearishly skewed front-month put/call open interest ratio of 1.43.

Where are these put traders focusing? Peak February put open interest resides at the out-of-the-money 44 strike, totaling more than 4,000 contracts. The February 45, 46, and 47 puts are also popular, with nearly 3,000 contracts open at each strike – all of which are out-of-the-money.

Call traders, meanwhile, have targeted the overhead February 50 strike, with more than 4,500 contracts open. Another 3,000-plus contracts are open at the February 49 call.

The bearish slant among options traders appears unfounded when considering SBUX’s strong price action. In fact, the shares have soared nearly 44% during the past 52 weeks, buoyed by support from its 50-day and 200-day moving averages. SBUX has since outpaced these trendlines, and is consolidating into support near $47. One caveat for this positive backdrop is that the stock’s 14-day RSI is hovering just south of overbought territory.

Daily SBUX chart with 50-day and 200-day moving averages

Those looking to trade SBUX ahead of tonight’s report might want to consider a bull call spread, potentially targeting the February 48 and 50 strikes. At the close on Wednesday, this spread was asked at $0.69, or $69 per pair of contracts. Entering at this price places breakeven at $48.69 – a roughly 2% gain from yesterday’s close – with a maximum profit of $1.31, or $131 per pair of contracts.

See Forbes for the entire article

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