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Chinstraps, Shoulder Pads And Buying Protection

|Includes: DIS, MA, Starbucks Corporation (SBUX), V

Maybe this is a day late and a dollar short. But after Monday's run on Starbucks SBUX, I thought it would be prudent to buy a small amount of protection.

Usually - and especially for my Future Blue Chips positions like Visa V, MasterCard MA and Disney DIS - I let the stocks ride into earnings. If the stock rallies on good results, great. If it falls due to temporary disappointment, I use it as an opportunity to buy more.

But Starbucks is a little different. The stock is up 10% on the month, 52% on the year and 65% over the past twelve months. It's become one of those "wish I had bought" stocks, instead of "I'm buying shares today" kind of stocks.

Back to specifics. After its big run, Starbucks has easily become the biggest position in my portfolio. Each time I have felt nervous about the rally ahead of earnings, the stock has surprised to the upside, rallied, and left me thankful I didn't hedge.

Maybe it will be more of the same. After all, the company is executing at an extremely high level and Mobile Order & Pay continues to gain monstrous momentum (just read my report from the company's latest meeting, here.)

Earnings are on Thursday and what I decided to do was buy some 62.50 puts and sell the $60 puts to create a 62.50/60 put spread, expiring Nov. 6th. I paid $0.67 (or $67 total) for each spread. To lower the price, you could also sell upside call options. I considered this, but would rather wait until closer to earnings to decide.

Note: if you are new to options or have never used them, I would suggest using caution when doing so. They can be tricky little bastards, to say the least.

I paid $0.67 per contract that, at its max value, could be worth $2.50. If Starbucks rallies on the results, we'll still enjoy gains in the stock price. If it falls, our hedges should gain in value.

There are much more complicated ways to hedge a position, but I prefer the simple route. Selling upside calls could easily make the overall price fall to $0.30 or less, depending on how far or close of a strike price you pick.

Maybe a different day I'll talk about broader portfolio hedging, but for now, this is how I'll protect Starbucks. It's not a blueprint for anyone else, but simply how I'm doing it today.

Disclosure: I am/we are long SBUX, V, MA, DIS.