EOT Trade Alert – May 27, 2011

Corey Williams | May 27, 2011

May 27, 2011

Trade Alert:

Buy SBUX January 2012 $38 Calls at $2.80 or better

Company Background:

Starbucks (SBUX) is the original espresso style coffee retailer. You probably drive by at least one of their stores every day. They sell and distribute specialty coffee as well as wholesale and trademark licensing.

Short-Term Catalyst:

We’ve profited from SBUX call options in the past. I think the time is right for SBUX to make another move higher.

Here’s why…

Starbucks is a great growth story.

Right now, SBUX is executing their growth strategy beautifully. They’re growing their core retail business and expanding into new businesses. And they’re doing it all while keeping a lid on costs.

The major headwind holding Starbucks back is the rising cost of coffee. Investors are concerned high coffee bean prices will eat into the company’s profits. But I’m not worried…

SBUX can easily pass these costs along to the consumer. In fact, they just announced a 17% hike in packaged coffee prices. And here’s the best part. Consumers won’t stop buying their favorite coffee because of these small increases.

Clearly, management isn’t going to let higher input costs derail their profit margins or growth plans. The price increases should set the stage for SBUX to make a big push higher in the second half of the year.

Investors’ main concern (rising coffee costs and weaker profit margins) is now in the rearview mirror. Now they can focus on the company’s growth potential. And that should lead to a higher price in the weeks ahead.

What’s more, SBUX looks good technically.

SBUX is in a strong uptrend. And it’s carved out a solid base over the last three months. This period of consolidation should serve as a launching pad for SBUX next leg higher.

But that’s not all…

These call options are unbelievably cheap. The relative stability of SBUX shares over the last few months has driven the volatility premium out of these options.

Let’s grab call options on SBUX now to profit from their next leg higher.

Trade Details:

Underlying Stock Symbol:	SBUX
Current Bid-Ask Price:	$2.69 – $2.74
Option “Buy Up To” Price:	$2.80
Break-Even On Stock At Expiration:	$40.80
Maximum Risk Per Contract:	$280

Exit Strategy:

SBUX is trading at $36.44 per share. Resistance levels will be at $40 and again at $45. Remember, we want this stock to move higher. Support levels will be at $32.50 and $30. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

Chart: