Trader makes a risky bet that Starbucks is set to sink

One trader is playing beaten-down shares of Starbucks with a risky bet that he sees as likely to succeed.

A slowdown in the restaurant industry and poor earnings have battered Starbucks even as it seeks to open new stores and introduce new menu options to attract customers. Starbucks shares have tumbled 12 percent this year, and Todd Gordon of sees them going even lower.

"It's a stock that's just been underperforming for months and heading into earnings on November 3. I think Starbucks is finally ready to punch through pretty critical support levels," Gordon said on Monday on CNBC's "Trading Nation."

On a daily chart of Starbucks, Gordon sees a support line at around $53 that the company looks to have recently fallen under. This leads Gordon to predict that Starbucks could very well see its stock fall even further, especially leading up to earnings.

However, the uncertainty around Starbucks leading up to earnings means that Gordon would also have to protect himself should earnings prove positive and the stock moves up.

As a result, Gordon looks out to the November 4 weekly options to make a trade, selling the 52.5-strike calls and buying 55-strike calls for $1.00 per share, or $100 per options spread. The trade will make him money as long as Starbucks stays below $53.49, which is about 1 percent above where the stock traded Monday afternoon.

The trade actually has Gordon risking $150 to make a maximum reward of $100, meaning that the maximum Gordon could lose on this trade is bigger than what he could make. However, Gordon believes that the decently high likelihood of the trade panning out makes up for the unfavorable risk-reward setup.

"Being that we're selling calls above the market, our probability of success instantly goes up," he pointed out.


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Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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