SBUX Update – Bulletproof Stock


“Bulletproof” SBUX… Guaranteed to be able to sell at $50 until October no mattter what.

…not only does Steve have zero cost basis for his $50 ‘stock insurance policy’, but he’s also reduced his cost basis on the stock!
Okay so I had a conversation last Friday, June 1 with my client and friend Steve S. Elsewhere on this blog, you’ll find a post titled, “Bulletproof… FOREVER” . In that post, I documented a “fence” that I helped Steve to build around his Starbucks stock.
Steve’s stock was up from where he had bought in. By doing a combination of plays he was able to capture a credit and completely BULLETPROOF his position as of last Friday.
Today Steve is  sitting pretty  because he did indeed buy those October $60 puts I spoke with him about on April 5, 2012  to protect himself.  You can go take a look at that post which was done real-time  but I can also summarize it for you here:
Steve has 1600 shares of  SBUX that he got  years ago at a cost basis of $12.50 a share.  I spoke to him about using an in-the-money, far-out-in-time put option  to protect the gains that his stock has made. While this addition locked in the gain his stock has made, it did cost him a little bit of money out of pocket… at first.
He’s glad he did it. Steve was able to keep a cool head while his stock plummeted over the last few weeks.
But here’s something even cooler…  Along with  the protective put,  we also implemented a near-term “nested spread trade “.  That is,  rather than simply hedging  the stock with a put option, we also  did a near-term play to capture credit  but again without limiting  the upside growth potential.
Steve’s “Income Method #6″ play was composed of 16 bear call spreads,  nested within the married put play in such a way so as to make the spreads riskless. That is, if SBUX went up, causing his bear call spreads to go against him… his gain in the stock would more than offset the possible loss from those spreads.
Because Starbucks has gone down since April, Steve was able to capture credit from those nested spreads and apply that income to the cost basis of his put options. Not shabby!
…the October $50 puts continue to protect his 1600 shares of SBUX. But now it’s like he’s been paid to do it!
There were a couple of issues that Steve encountered in ‘managing’ those nested bear call spreads… but he did capture a credit which reduced the cost basis of his sixteen Oct $60 put options down to $5.23 each. That’s a good deal to protect SBUX at such a high level…
…but the best part is this! On June 1st,  Steve  was able to  use another RadioActive Trading Income Method to completely pay for his “insurance policy”, while leaving the upside open for growth in case SBUX makes a comeback. It started like this:
So by expiration Friday in May, Steve’s adjusted cost basis for the Oct $60 puts, PLUS his original cost for the stock made for a total cost basis (for the married put position) of $17.73. But SBUX wanted to keep coming down. Look at the GENIUS play Steve did on Friday:
Steve took the October $60 puts and sold them, while at the same time buying an equal number (16) of the October $50 puts to continue to protect his 1600 shares of SBUX. But now it’s like he’s been paid to do it!
This is shown by the fact that now, Steve’s net cost basis for the stock AND the $50 puts… is lower than his cost basis for the stock itself was in the first place!
Pretty cool, right? I’M impressed with this move. So now Steve has nothing out of pocket… has reduced the cost of his 1600 shares from $12.50 apiece to $11.98 apiece… has a guaranteed exit at the $50 level in case of catastrophe.
Perhaps I should mention that SBUX also paid a dividend of .17 cents on 5/25. bringing the cost basis down even further to $11.81. Nice going, Steve! 8-)
No cost basis for the $50 put… it has been paid for.
The very best part is that right now, Steve and I are collaborating on Income Method #11. I can’t talk about that here, it’s reserved for Fusion subscribers. But I think Steve is going to have another happy, happy trade by this July expiration. Watch this space, I’ll fill you in on at least some of the details.
Okay Traders! Sound off below! Tell me what you think of Steve, SBUX, and Income Method. Til then,
Happy Trading!

About Kurt Frankenberg

Kurt Frankenberg is an author and speaker about entrepreneurship, martial arts, and trading the stock and options markets. One of several "Biznesses" he founded as a teen, The Freedom School of Martial Arts, has been in continuous operation since 1986. Kurt lives in Colorado Springs with his wife Sabrina, German Shepherd Jovi, and his ninja cat Tabi.