With QE2 seeping its way into the markets and not much on the news on the horizon other than the run of the mill sovereign debt issues overseas, it's time to hunker down as we approach year end.
Strategic Mindset: Neutral
After the release of earnings, and no other known news announcements, we'll look for
to maintain a range, or attempt to fill the gap below the current price.
Target: SBUX Trading at $30.19
SBUX released earnings so there are no other known news announcements that might drive the stock higher. The trade we've selected gives the stock room to fill the gap to the downside, or the stock would have to continue to make new highs to move out of the break-even prices for this trade. There is a dividend to be paid, but that does not affect this trade so there is nothing to worry about there.
Tactic: Calendar Spread
- Buy to open 47 January 30 puts
- Sell to open 47 December 30 puts
- As a spread
- For a net debit of $0.50
- Max risk per spread = $0.50 per share; $50 per spread
- Max profit = Approximately $0.64 per share; $64 per spread
- Break evens = Approximately $28.29 to 31.82
Here's how the tactic is employed: We'll buy the calendar spread by buying the longer term January option and simultaneously selling the shorter term December option as a spread for a net debit of $0.50. As long as the stock hangs around its current range this trade should start to generate profits over time.
50% loss of the initial debit. That means if the spread decreases in value to $0.25, then we'll close the spread.
Close trade if commit criteria significantly changes.
The first profit level we want to reach is 50% of the potential profit, which is about $0.32. So if the trade reaches a price of $0.82, then we'll reset the Eject Criteria to the 25% level, which would be $0.66.
Once we've hit an exit, we'll close the trade by selling to close the January 30 puts, buying to close the December 30 puts, and we'll do that as a spread, for a net credit.
- Sell to close 47 January 30 puts
- Buy to close 47 December 30 puts
- As a spread
- For a net credit
We don't believe that my daily venti upside down caramel macchiato addiction will drive SBUX significantly higher in the coming months. This trade is an example of how we apply the discipline and risk management methodologies we employed on the frontlines to options trading.
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Matthew "Whiz" Buckley is a partner at
a provider of options education and practical applications for options traders of all levels. He is also the founder of Strike Fighter Financial LLC, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. Buckley flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over southern Iraq. After leaving active duty, he served as a managing director at a Wall Street volatility arbitrage options firm and was a founder and the CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his book "From Sea Level to C Level."