A 120% Profit on SBUX Calls

Once again, a high probability trade setup has come through. In the April 28th newsletter I highlighted the trading range that was apparent in Starbucks (SBUX) stock. These often make good higher probability trades when you find one on a stock with good fundamentals, a good story, and the stock is just rebounding off the bottom of the range.

(from the 4/28/2014 Seasonal Forecaster newsletter)

I pointed out that “SBUX happens to have a good track record over the next 9 weeks – an average 8.2% gain, with gains in 16 out of the 21 years“. This made it an even higher probability trade because it strongly suggests that institutions regularly accumulate the stock this time of year.

The trade I focused on was buying the stock at the current price (with a limit of 73), and selling the stock at 78, as it approached the top of the trading range. Why sell it as it approached the top of the range and not hold on for more gains? Again, this strategy increases the chances of success even more. The longer you stay in a trade, the more likely the stock will retreat from profit taking and you'll give back your gains.

So a good initial approach with a trading range trade is to plan to sell as the stock as soon as it nears the top of the range. As the stock actually approaches the top, you can evaluate the strength of the stock and the overall market, and change your trade strategy if appropriate. If the stock appears very strong, you can just hold on to the stock and switch over to a trailing-stop or some other profit-capturing strategy.

One way to judge the strength of the stock is to look at the volume pattern. How much volume is there on recent up-close days compared to down-close days? Another way is to look for gaps and identify the type of each gap (see Analyzing Chart Patterns: Gaps).

SBUX produced a Breakaway gap in late May as it finally broke above its recent consolidation. With our trade entry at 71.6 on 4/29, yesterday's likely Runaway gap left the position with a 7.9% gain over 8 weeks. So the trade has approached the original target both in percentage gain and in time.

I also suggested a replacement trade, for those who like to use options instead of stock, of buying the June 67.5 call, which traded for around $4.40 at the time of trade entry. That option expires after the close of trading today and should be sold. It currently is up 120%.

So with the stock, do we sell at the original price target, or do we hold on for further gains? A conservative way to trade this is to sell at our original price target (of 78), picked because it was just below resistance, meaning the top of the trading range. If SBUX is really that strong, we can re-enter the long stock position if SBUX blasts above the top of the range, proving there is strong buying behind the stock. If your commissions are low, it costs very little to get out as a stock nears the top of a range and re-enter if it breaks above. If the stock doesn't have strong buying behind it, it will likely fall back from the top and you will have gotten out near maximum profit, at least for this move in the stock.

What do we do with our SBUX position?  Details are in today's newsletter.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.