Starbucks: Writing Covered Calls As Shares Rallied

Summary:

• Shares of Starbucks surged after Brian Niccol, former Chipotle CEO, was announced as the new CEO earlier this year.
• We took advantage of that move by writing some covered calls; with those coming up to their expiration, we took the opportunity to close those out and reload the trade.
• The new CEO faces significant challenges to turnaround this company back to meaningful growth in order to see the types of trading multiples the market had previously applied.

Written by Nick Ackerman

When Starbucks (NASDAQ:SBUX) announced a new CEO was going to be taking over, Brian Niccol, shares went surging higher. We took advantage of this massive move by writing some covered calls on our long position, and we’ve recently closed that trade out to write some more covered calls as shares remain elevated.

Latest Covered Call Moves

We sold the October 18, 2024, at a $105 strike price, collecting $1.20. Here is a recap of the commentary with the rationale of the move.

Shares of SBUX are moving higher today, which was actually the ex-dividend date as well.

That said, the real news that sent shares up massively earlier in the week was that the CEO was being replaced. Effective immediately, Laxman Narasimhan was stepping down and would be replaced by Brian Niccol effective September 9th.

Shares of SBUX have been under significant pressure after releasing their Q2 earnings earlier this year. The Q3 earnings were a bit of an improvement, but it certainly wasn’t great either. Certainly not good enough to make the stock price recover at all.

Most of the excitement here seems to be driven by the fact that Niccol was the Chipotle (CMG) CEO, which he led very successfully. He became the CEO in March 2018, and since that time, shares have rallied by over 800%-prior to the latest sell-off, with the announcement of his departure sending shares promptly lower.

Of course, only time will tell if he’s successful in his turnaround efforts or if it was more luck/timing.

Since writing those initial calls, shares have more or less moved sideways.

That’s allowed us to let that time decay work its magic, letting us close out those previous covered calls with the majority of the profit locked in. By turning around and selling another round of covered calls, that brings us in even more option premium.

The Trades:

• First: Buy to Close Starbucks October 18, 2024 $105 Calls – cost $0.10
• Second: Sell to Open Starbucks November 15, 2024 $110 Calls – collected $0.65

In this case, I’ve chosen to go with the $110 strike price because there is anticipation to be more volatility during the next month, with their earnings expected at the end of October. This will be the first earnings with the new CEO, so it should be a more interesting one.

They still haven’t announced a dividend yet, which has been done historically last month, and it is usually the announcement of an increase. This is something I discussed previously, and it is a bit concerning as they could be saving it for earnings to announce a cut. With a new CEO, they may just want a kitchen sink quarter and a bit of a “reset.”

We’ve had a number of dividend increases this month right on schedule. However, one notable missing name here is Starbucks. SBUX has traditionally announced its annual increase in September, but with a new CEO, the company could be breaking from that trend. With a new leader, they could hold the dividend flat or, worst case scenario, even potentially cut the dividend. That could help preserve cash while the new CEO tries to implement a turnaround back to growth.

Either way, I rolled the trade up to $110 in case it works out the other way and shares pop. With higher implied volatility, it means the premium collected is still quite reasonable even rolling out just one more month. For covered calls, I personally like to see the annualized option premium received above the dividend yield.

We have a couple of ways to calculate the potential annualized return in this scenario.

• Against the $110 strike price, receiving the net premium of $0.55 for the roll works out to a potential annualized return of 4.93% (double the dividend yield.)
• The net premium received of $0.55 based on our assigned strike price of $101, when we originally took shares, comes out to 5.37%.
• For investors who are perhaps only participating in the second leg and receiving $0.65 in premium, as they don’t have the closing cost, the PAR comes to 5.99% on the $110 strike.

According to Fidelity probability calculation, there is around an 80% chance the trade will expire worthless.

I’m assuming that they will still pay a dividend and not eliminate it entirely, even if they choose not to raise or even cut it. With that, they had historically gone with an ex-dividend date in the first half of November, which means we should still be able to receive that payment as well.

Recap of All Prior Trades

Since we took assignment, we’ve had the opportunity to generate option premium through writing covered calls over the years, helping to generate meaningful additional cash flow on this name!

Here is the recap:

Ticker	Expiration Date	Upper Strike	Current Price	Type Sold	Date Initiated	Premium Collected	Date Closed	Closing Cost	Gain/Loss
SBUX	11/15/2024	$110.00	$96.00	Calls	10/09/2024	$0.65	TBD	TBD	TBD
SBUX	10/18/2024	$105.00	Rolled	Calls	08/16/2024	$1.20	10/09/2024	$0.10	$1.10
SBUX	02/16/2024	$110.00	Expired	Calls	11/29/2023	$1.19	Expired	–	$1.19
SBUX	12/15/2023	$105.00	Rolled	Calls	10/18/2023	$0.75	11/29/2023	$0.29	$0.46
SBUX	08/25/2023	$110.00	Expired	Calls	07/17/2023	$0.69	Expired	–	$0.69
SBUX	07/21/2023	$110.00	Rolled	Calls	04/17/2023	$4.93	07/17/2023	$0.04	$4.89
SBUX	04/28/2023	$105.00	Rolled	Calls	03/27/2023	$0.86	04/17/2023	$4.00	-$3.14
SBUX	03/24/2023	$111.00	Expired	Calls	02/15/2023	$2.16	Expired	–	$2.16
SBUX	02/17/2023	$110.00	Rolled	Calls	12/12/2022	$2.46	02/15/2023	$0.24	$2.22
SBUX	12/16/2022	$105.00	Rolled	Calls	11/04/2022	$0.51	12/12/2022	$0.53	-$0.02
SBUX	03/18/2022	$105.00	Expired	Calls	02/07/2022	$0.58	Expired	–	$0.58
SBUX	02/04/2022	$101.00	Assigned	Puts	01/07/2022	$1.25	Assigned	–	$1.25

Click to enlarge

On a couple of occasions, we generated a loss in order to roll it higher, the most notable being the April 2023 trade that we rolled from $105 to $110. That said, in total, we’ve collected $11.38 in premiums to take our breakeven for SBUX down to $89.62 from the $101 level. With the latest $0.65, that moves it a bit lower yet to $88.97.

Admittedly, this is actually not one of our better results as annualized that would work out to 4.17% against a $101 share price. For some context, though, alternatively, an investor just holding shares of SBUX through this time would have received $5.87 in dividends. That is roughly half of what we received in option premiums. Of course, we were also receiving those dividends as well for a total of dividend + premium collected of $17.25, moving the annualized result up to a bit more respectable 6.32%.

A Look At Valuation

In general, it looks like SBUX continues to trade below its fair value range based on its historical P/E. Shares currently are trading with a forward P/E of 24.35x, with the historical range between 27 and 33x.

With that said, this is one of those examples where things have changed materially with the company, and that’s based on their growth expectations as headwinds start to mount. Revenue growth has slowed compared to where growth had previously been.

That includes EPS growth coming in slower or expected to come in slower as well.

Given that, it is understandable why investors would likely not want to push shares back to where they had historically been trading. Slower growth and more uncertainty are going to equal investors being more cautious.

The new CEO has a lot of work to try to turnaround this company back to the growth it had once seen before investors will probably be willing to bid it up to the valuations it had seen previously. That’s why I feel that writing covered calls, and continuing to write more, is a fairly attractive way to play with a portion of my position currently.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of SBUX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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