Last Friday’s "Options Action" was neither bullish nor bearish; it was strictly contrarian. The traders found a way to get bullish on a name almost everyone thinks is in unremitting decline – Best Buy . And they got bearish on Starbuck , a company that the street just loves— with 23 ‘Buy’ ratings and only one ‘Underperform.’
Let’s start with the coffee giant. Dan Nathan of riskreversal.commade the case the Starbucks would suffer the same fate as Nike , as both companies get much of their revenue from abroad. With the global slowdown showing few letting up, and with Starbucks trading at a multiple befitting only a growth story, any misstep could greatly damage the stock. Nathan pointed out that Nike and Starbucks have traded in lockstep over the past year, and with Nike falling sharply on the earnings disappointment, Starbucks could be set to follow it down.
As a bearish trade, Nathan suggested buying the 50/45 put spread for $0.85. His trade and payout are below. Interesting to note that in an otherwise quiet day, that put spread has traded over 3,100 times and is the two must active contracts in all of Starbucks options. We thank the fans for watching.
DAN’S STARBUCKS TRADE
• BUY THE AUGUST 50-STRIKE PUT FOR $1.30
• SELL THE AUGUST 45-STRIKE PUT FOR $0.45
HOW DAN’S STARBUCKS TRADE MAKES MONEY
• LOSSES ABOVE $49.15
• PROFITS BELOW $49.15
• PROFITS CAPPED AT $45.00
On to the next contrarian trade. Oppenheimer’s Carter Worth looked at several charts of Best Buy, and made the case that the stock is “so bad that it’s good.” The stock has traded down to its 2009 lows, but the company’s earnings story remains intact; Best Buy’s P/E as well as price-to-cash-flow ratio are at historic lows.
Mike agreed with Carter, and added that the company could be the target of a management-led buyout. He recommended bullish strategy called a “risk reversal,” in which he bought a call, and financed that purchase by selling a put. He took in a twenty-five cent credit for doing the trade, and has a great deal of leverage to the upside—but he must be comfortable getting put the stock if it trades below $18 (though he will buy it at an effective price of $17.75).
The trade already looks like a “best buy,” with the stock shooting up over 5% today on, well, buyout talk. His trade and payout are below.
MIKE’S BEST BUY TRADE
• SELL THE JANUARY ’13 18-STRIKE PUT FOR $1.75
• BUY JANUARY ’13 24-STRIKE CALL FOR $1.50
HOW MIKE’S BEST BUY TRADE MAKES MONEY
• GET LONG AT $18.00
• PROFITS ABOVE $17.75
• LOSSES BELOW
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