Shares of coffee chain Starbucks (SBUX) have rebounded strongly off of earnings in the past few days. One trader sees a further rally in shares over the months ahead.
That’s based on the March $115 calls. With 127 days until expiration, 86,914 contracts traded compared to a prior open interest of 330, for a staggering 263-fold jump in volume on the trade. The buyer of the calls paid $0.89 to make the bet.
Shares recently traded around $90, so they would need to rise about $25, or about 28 percent, for the option to move in-the-money. The strike price of $115 is close to the prior 52-week high of $117.80.
Customers continue to get their beverage fix at the company, even as shares have dropped 20 percent in the past year. With the stock going from 46 times earnings to about 27 times forward earnings, shares are cheaper.
While a bit pricey compared to the overall market, for a company with strong branding and inflation power, shares are likely fairly valued here.
Action to take: Investors may want to start gradually buying shares here. Starbucks isn’t just raising prices for customers – the company also increased its dividend, which now yields 2.3 percent.
For traders, the calls are an inexpensive bet on a move higher. That could potentially occur in the coming months. The option can likely deliver high-double-digit returns on a continued rally in shares, and are worth a consideration.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.