Chris Johnson

Use a Strangle to Profit From Starbucks' Earnings

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Starbucks (SBUX) has been a big mover -- up and down -- after earnings, and the company is schedule to report today after the close.

I'm sure you know the Starbucks story -- the company's struggle to find its vision, the damage done by the recession, and the bold new competition from McDonald's (MCD) and Dunkin Donuts.

But you may have missed the run (up 18%) in the stock in the past week -- a massive red flag ahead of earnings this afternoon. We must prepare for a "sell the news" rush immediately after the announcement. The stock could go either way, which means the best way to play this is with a strangle.

A strangle is where you hold a position in both a call and a put with different strike prices, but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset.

This is a good strategy if you think there will be a large price movement in the near future. Clearly, SBUX's earnings announcement gives us a perfect opportunity to use the strangle strategy.

For the SBUX trade, I recommend combining a bullish call and a bearish put. Simultaneously buy the Starbucks May 13 Puts (SQXQJ) and the Starbucks May 14 Calls (SQXEK) to create a strangle position ahead of today's earnings report. Do not pay more than $2 for the total position. Notice that you should buy this as a ONE TRADE with ONE COMMISSION.

This trade is a win-win for you and not at all difficult to execute, even if you are unfamiliar with the strategy. If the news from Starbucks is good, sell and lock in that profit. If the news is bad, ditto.

And if the news is very good -- cost-cutting is working, vision is recovered -- BOOM, the stock runs up 25% to $17.

Don't sit back and let profits slip through your fingers this earnings season. You can get specific recommendations from Chris Johnson, complete with buy and sell instructions, by signing up for Winning Edge today.

Chris Johnson is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Chris, read his bio here.