Starbucks stock stalled out at the 200-day moving average and is now back below the 21-day, 50-day, and 200-day moving averages.
On Monday, the stock closed near the low of the day while putting in a bearish candlestick. Today, I'm looking at a bear call spread that assumes Starbucks will struggle to get back to the 90 level between now and mid-October.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call. The strategy can be profitable if the stock trades lower, sideways, or even slightly higher, as long as it stays below the short call at expiry.
An October 17 expiry bear call spread on Starbucks stock using the 90-95 strike prices can be sold for around $1.30.
Traders selling the spread would receive $130 in option premium, which is also the maximum possible gain. The maximum loss would be $370. That represents a potential return of 35% between now and October 17.
Spread Strategy's Profit And Loss Potential
The spread will achieve the maximum profit if Starbucks stock closes below 90 on October 17. In that case, the entire spread expires worthless, allowing the trader to keep the $130 option premium.
The maximum loss will occur if Starbucks closes above 95 on Oct. 17, which would see the premium seller lose $370 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy. This way, you always know the worst-case scenario in advance.
A stop loss could be set if Starbucks trades above 90, or if the spread value rises from $1.30 to $2.60.
Bear call spreads can be a good way to potentially generate some income while a stock remains in a downtrend.
Starbucks' Challenges
According to the IBD Stock Checkup, Starbucks stock is ranked number 30 in its group and has a Composite Rating of 11, an EPS Rating of 47 and a Relative Strength Rating of 20.
Starbucks continues to face challenges in its core operations with the company also scaling back production at its U.S. plants, signaling softer demand, and raising concerns about future growth
Heavy investments in labor, store transformation, and leadership programs have compressed margins and dragged down profitability. Starbucks is not due to report earnings until late October, so this trade should have no earnings risk.
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.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
