ORATS Earnings Reports (Long Form)

Discussion in 'Options' started by Matt_ORATS, Jul 31, 2022.

  1. Matt_ORATS

    Matt_ORATS Sponsor

    Starbucks: Using Options to Play Capped Upside Potential Post-Earnings
    • Discretionary stocks have led the S&P 500’s recovery over the last several weeks
    • Starbucks faces several headwinds, and the bar might be low enough come Tuesday night when earnings hit the tape, but resistance on the chart suggests caution
    • ORATS highlights a bearish bet options traders can make
    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade.

    Consumer Discretionary (XLY) has been the best sector since the market’s bottom on June 16. Not all stocks have participated, though. Those with a global footprint, with particular exposure to China, have struggled to weather that nation’s strict Covid policies. After good numbers from McDonald’s (MCD) and a positive stock reaction from Yum China (YUMC), all eyes are now on Starbucks (SBUX) for the latest clues on the state of both the American consumer and those globally.

    Discretionary Leads From the June 16 Market Low

    According to Bank of America Global Research, Starbucks is the world's leading coffee retailer, with more than 29,000 locations (with total units split roughly half company-owned and half licensed). The company purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espressos, teas, cold-blended beverages, and complementary foods. Starbucks has recently expanded beyond its core retail business into consumer products leveraging the strength of its brand equity.

    The Seattle-based $97 billion market cap Consumer Discretionary stock, listed on both the Nasdaq 100 (QQQ) and S&P 500 (SPY), features a P/E ratio near 25.4 times last year’s earnings, according to ORATS, which is 46.4% under the average for the last twelve earnings observations.

    Robust EPS growth through 2024 may warrant an above-market earnings multiple. BofA sees profits rising more than 35% next year after a big 2022 drop. The stock yields 2.3%, according to The Wall Street Journal.

    SBUX: Earnings, Valuation, Dividends


    As a result of this year’s expected earnings decline, Starbucks’ forward P/E ratio is lofty near 25 times. That’s actually on par with other restaurant stocks.

    Above-Market Earnings Multiples in the Restaurants Industry

    ORATS shows a $0.75 consensus earnings estimate for Starbucks’ reporting date confirmed for Tuesday, August 2, AMC. That would be a whopping 26% year-on-year net income per share drop. Higher labor costs and certainly the Covid-related shutdowns in China weigh on firm profits. Since the May quarterly report, there have been four analyst downgrades of the stock with just a single upgrade. On the upside, SBUX has beaten analysts’ estimates in seven of the past eight earnings reports, according to ORATS data.

    Starbucks Earnings Date Options Color


    The options market expects a move of 4.9% in either direction. This move was breached in 4 out of the last 12 earnings.

    Historical Implied Moves vs Actuals


    During that time, the post-earnings move was outside of the implied range 4 times. In those cases, long straddles were profitable. The rest of the earnings moves likely yielded profitable short straddles.

    The Technical Take

    SBUX recently broke above key resistance in the low $80s to climb near $85 late last week. Next resistance comes into play around $93 – the late March peak (and an old gap fill) before shares plunged below $70 during the worst of China’s Covid lockdowns. That high $60s range was important from late 2018 through mid-2020 (sans the Covid Crash). Keep these price levels in mind around Tuesday night’s earnings announcement and stock price reaction.

    SBUX Resistance Near $93 Caps Upside


    The Options Angle

    ORATS quantitative analysis finds that the highest ranked trade is a Long Put Calendar with strikes at 85, expiring on Friday, September 9th and Friday, August 19th, for a debit of $0.78. This is a play on the stock indeed finding resistance in the low $90s and pulling back to the $85 strike.

    Long Put Calendar Play


    By pulling up the trade on the ORATS dashboard, we can see the theoretical values in more detail. The distribution edge, found by the expected value of the payoff picture on the stock's historical distribution, has an edge of 26.3%. The forecast edge, which is derived from historical volatility, has an edge of 10.0%. Lastly, the smoothed edge, which is calculated by drawing a best fit curve through the monthly implied volatilities, has an edge of 1.3%. The edge is relative to the mid-market price of the trade. Greater positive edges are a theoretical benefit to the trader. We can also look at the payoff graph.

    The reward to risk divides the max gain by the max loss. Here 2.3:1 is the ratio of the max gain of $187 to the max loss of $-80. There are two break evens for this Long Put Calendar at $80.95 and $89.55.

    Options Valuation


    Over the last month, the stock price rose 10.3%, while the thirty-day implied volatility rose 1.5%. The average slope of the trendlines is negative. The heatmap on the right side of the graph is green where volatility and slope are undervalued, and red where they are overvalued. In this case, short-term implied volatility and slope are neutral, while the long-term is slightly undervalued.

    Monthly Implied Volatility Slopes


    The Bottom Line

    Starbucks looks to rebound from a dismal 52 weeks. Down 31% from this time in 2021, the stock recently broke above resistance and might look to continue the uptrend after its earnings report Tuesday. But gains may be capped at $93 leading to an eventual retreat. ORATS finds that a long put calendar spread at the $85 strike using the (short) August and (long) September expirations is the optimal trade.

    You can watch our full Starbucks earnings preview here. For any questions or issues with the article, please contact otto@orats.com. To subscribe to the dashboard, please visit https://orats.com/dashboard

    Disclaimer: The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Options trading and investing involves risk and is not suitable for all investors.

    Disclaimer: MIke Zaccardi has no positions in the securities mentioned in this article.
    Atikon, taowave, ajacobson and 2 others like this.
  2. cesfx


    Thanks @Matt_ORATS , is this an example of a earning analysis you would access with the dashboard package?
    taowave and Matt_ORATS like this.
  3. Matt_ORATS

    Matt_ORATS Sponsor

  4. Secatu


    ORATS analysis as good a technical/fundamental data trading strategy site as you'll find. YET, I've followed them a couple months and have lost on several strategies (paper trade). I think that's primarily due to the crazy swings we've seen with earnings stocks in this weird post-pandemic/pre-recession market.

    With earnings on strong companies in an up-trending bear market, I personally like long straddles. When emotions run high, so do the markets - either way.
    Matt_ORATS and cesfx like this.
  5. Nobert


    SBUX worth zero without it's cashflow, although, a dentist friend of mine, ,,bragged" about visiting them in Rome or smthn.
  6. ffs1001


    @Matt_ORATS , I assume that these break-evens are calculated using the current IV's. Does the system allow for the fact that the long IV will fall drastically (as well as the short IV falling)? And how much of a fall in this IV does the system allow for? Basically, the break-evens will change once the earnings are done. They can expand (if the long IV holds up better than expected) or contract, and I'm curious to know how the system would cater for this.

    Also, how is the long expiry date calculated (09-Sep)? In practical terms, it would be easier to buy the 20-Sep longs (liquidity, quicker fills). SBUX may be fine, but for stocks with lower options OI (eg ULTA) a trade may seem great in the analysis, but in practice, the spreads would be too wide, and fills are difficult to achieve.

    I've traded "through earnings" calendars, and speak from experience.
    Matt_ORATS likes this.
  7. ffs1001


    If you've lost money in paper trades, then in a real money account, the losses would have been even greater, cos in paper accounts, the fills are very optimistic.
  8. Secatu


    Yeah, I know. I don't normally do earnings trades, but thought I'd check it out the free way. I know you can do well if you're on the right side, but too volatile for my old blood.
    Matt_ORATS likes this.
  9. Matt_ORATS

    Matt_ORATS Sponsor

    Yes, earnings trades are tough. We have another report where we follow the trades and it does well on calendars, and not great on straddles.
    The SBUX calendar above is doing well, $1 now vs $0.80 cost.
  10. Matt_ORATS

    Matt_ORATS Sponsor

    This is a good question. I am checking our method with the developers. A good rule would be to use the ex-earnings IV if the front month expires after earnings.
    How we would do it: We have the estimated extra IV in each earnings month.
    For example, since the short expiry in the calendar expires after earnings 8/2, the longer dated IV should be adjusted down for the amount it is expected to fall after earnings. "earnEffect" above in our Monies endpoint is that amount 5.9%. We get those amounts by solving for the best fit term structure to a model term structure curve we have developed. Above the post earnings is about a 32% IV where the Sep 9th is a 38% IV.
    #10     Aug 4, 2022
    ffs1001 likes this.