Starbucks shareholders licking their wounds this week could use a so-called call spread options trade to try to salvage some return in the wake of the big drop in the shares. Let’s review. Starbucks (SBUX) on Wednesday traded nearly seven times the 20-day average equity volume and 10 times the average daily options volume as the shares fell nearly 16%. The coffee maker reported earnings for the quarter that were far short of estimates . It was the fourth-worst trading day for Starbucks since the company’s IPO in 1992. If one is wondering what could have hit the company’s operating results so hard, one might remember the phrase coined the same year Starbucks shares began trading. That was also the year Clinton strategist James Carville coined the phrase “The economy, stupid.” An assumption many investors held prior to the earnings release was that Starbucks customers would be less affected by inflation than those of McDonald’s, which also reported on Tuesday. On the McDonald’s call, inflation, affordability and pricing were the leading topics. In Starbucks’ case, the company instead discussed economic challenges more generally, citing a “more cautious consumer.” And with respect to China specifically, Starbucks said the recovery there has been “choppy” with intense price wars. So how tough was the quarter? Starbucks reported $8.56 billion in second-quarter revenue, which represents a year-on-year decline of 1.8%. Adjusting for inflation that decline is even larger. Don’t try to catch a falling knife This presents a significant challenge for an investor in Starbucks stock. SBUX YTD mountain Starbucks, YTD While it’s true that the company’s valuation, at 22 times forward earnings estimates, is near the lowest level seen in the past 10 years, it is also clear that analysts had badly overestimated the company’s performance for this most recently reported quarter. Trying to catch the falling knife by committing additional capital isn’t advisable without more clarity on the how Starbucks can successfully navigate the economic headwinds they cite globally. Additionally. it’s unlikely the share price can recover to $88 a share where it was trading prior to this release anytime soon. The trade: So what can an investor do to boost their returns if SBUX recovers slightly without taking significant additional downside risk? For this a shareholder can overlay their stock position with a low or zero-cost 1×2 call spread. The idea is to create a modest boost to…
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