In October we took a look at Starbucks (SBUX) following a pullback to 55, and detailed a way to play for a bounce an a move back towards 60. Here was the original trade idea, from Oct 27th:
Buy the SBUX ($55) Dec 55/60 call spread for 1.30
- Buy to open 1 Dec 55 call for 1.47
- Sell to open 1 Dec 60 call at .17
A few weeks later, after the stock had bounced to 58, we checked back in on the trade when it was worth 2.35, a nice two week gain. From November 9th:
For those happy with the profits on this bounce it makes sense to simply close here and look for another entry. For those looking to extend the view while taking most of the profits, one roll to consider is to sell the Dec 55 calls at a profit, and use some of that to buy the Jan 60 calls for .65, creating a Dec/Jan 60 call calendar for a credit. That risks some of the profits but cannot become an overall loser. And a move higher towards 60 by Dec expiration set’s up for another roll out into January and a possible breakout into 2018.
I want to dive deeper on the roll part of that paragraph as it’s one of my favorite ways to keep bullish exposure after an initial move where you want to book profits. In this case the trade was nearly a double, and taking profits made sense. But if you want to stay in the game and extend the view out, you want to do it in a way that books profits, doesn’t add deltas, but most importantly doesn’t require turning profits into a lotto ticket. The roll of the in the money call out to January, establishing a call calendar does just that.
In this particular case, selling the Dec 55 call and only spending .65 of that on the Jan 60 call booked about half the profits, and established a call calendar that was basically a free look out to January with the other half of the profits.
Now with the stock near 60 it is in a perfect spot. The calendar is worth about .75 here. As a calendar it can be worth more, as the Dec 60 calls (currently worth .50) decay at a faster rate than the Jan 60 calls (currently worth 1.25). And then, as we get closer to Dec expiration on the 15th we can then close the Dec 60 calls, booking even more profits) and roll them out and up in January, creating a Jan 60/62.50 call spread at a credit, with even more profit potential into 2018.
There isn’t anything to do now, but in the next week or so that roll makes sense, and the only thing to guard against (to maximize profit on the roll) is to keep stops below in the stock and just above 60, the closer the stock is to 60 when the roll happens the better. This is a good example of how to use the houses money to keep a realistic bullish stance.