Options Update: Put Activity Percolates on Starbucks

Finally, the Rock has returned to Options Update … just kidding folks, I am a temporary stop-gap today, as your regular author (Joseph Hargett) gets some much-needed rest. I will do my level best to continue the high standards of this article, which were established after my stint as author.

But enough of the self-deprecation (and during Be Kind to Editors and Writers Month, no less), let’s get on to the reason you come here in the first place – an update on some of the day’s most active options.

It seems that the stars have aligned and the option gods have smiled upon yours truly today, as I get to cover one of my absolute favorite stocks … (had to use ellipses on National Punctuation Day) Starbucks
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. Today, the company announced new items are going to be added to its breakfast menu. Next week, you will be able to buy a Piadini to accompany your mocha-frappa-caramel-grande-venti-cappu-smoothie-cino (with sprinkles and whipped cream). What is a Piadini, you ask? It is a sandwich that features artisan bread and will be filled with sausage, egg and cheese, or Portobello mushroom, along with spinach and ricotta cheese. With the success of the company’s breakfast menu (especially Schultzie’s ultimate oatmeal), this is a genius move, right?

I disagree … and not because I think Schultzie has made some bone-headed moves. However, we can chalk this one up with the 30-minute dump rule and the new coffee machines for every store, as SBUX has to buy ovens for 800 more of its stores. (Yes, there are ovens in roughly 3,000 locations, but the coffee king hopes to have ovens in 90% of its stores over time.) Yes, good ideas will cost money, but SBUX has been losing market share and money to its competitors … I’d think focusing on cheaper coffee may be a good move. Of course, SBUX just changed the type of cheese they use because the warming cheese odor interfered with the coffee aroma; maybe they do get coffee, just not consumers.

It seems that I am not the only one who holds SBUX in a bearish light, at least not today. On our Intraday Volume Explosion List, SBUX shows up on the most active puts. Total put activity on the baron of the bean has accelerated 3.73 times the norm, with a majority of the focus falling on the November 12 put (SQX WN). This activity caught my eye, indicating further examination was needed.

Earlier this morning, in the span of roughly 19 seconds, 1,320 SQX WN contracts crossed the tape in blocks of 600, 600, and 120. The first and third of these blocks crossed at the ask price, and the middle transaction crossed a penny short of the ask price. I don’t think I am going out on a limb here by stating that these contracts were more than likely purchased.

Brewing the Numbers

Yeah, it doesn’t make sense, but it follows the coffee theme. The first block of 600 contracts cost the purchaser 38 cents, so we have (600 * 100) * 0.38 to give us a price-tag of $22,800. The second block of 600 cost $22,200 and the block of 120 cost $4,560. Were all these contracts purchased by the same person/institution? Possibly, but it is also possible that these transactions were indeed separate. For these positions to break even, the stock would have to fall to $11.63 (strike price less the price per contract) – is it possible?

Pessimism Percolates

At one time, SBUX was the proverbial apple of option speculators’ eyes; that isn’t the case anymore. The frappucino firm’s Schaeffer’s put/call open interest ratio (SOIR) of 0.94 is lower than 88% of those taken during the past 52 weeks. Yes, this pessimism could unwind and push the stock higher, but I don’t see that happening any time soon – call it a hunch for now.

As for analysts, 3 of the 11 brokerages tracking SBUX rate it a “strong buy,” while the remaining 8 deem it worthy of a “hold” designation. Yes, the 8 fence-sitters could issue upgrades, but the impact may be less than downgrades from the 3 über bulls.

Technically Whipped

SBUX has been in a free-fall during the past 52 weeks, losing 44.4% during this time period. The main cause of this drop is the firm’s 10-month moving average. The last time SBUX closed a month atop this trendline was October 2006. Not only is this trendline in the way of any rally, but its 20-month counterpart also lurks overhead.

Monthly chart of SBUX since January 2006 with 10-Month and 20-Month Moving Averages

That said, let’s look at the chances of this put position turning profitable. We need the stock to slip past the $11.60 region for the hypothetical option player to break even. Taking a look at the play using these parameters, that 12 put may be too gutsy of a play. Why? The 14 level seems as if it’s ready to step in and provide support.

This level has propped up the stock in each of the past 3 months, and is the site of peak put open interest in the November option series. Should the equity manage to stay above 14 in the next month and a half, we could see 14 stem the technical tide. What about the 10-month moving average? It has to drop 12% before coming into play, and that could take some time.

The Verdict?

I am bearish on SBUX, you can’t hide that. However, an in-the-money play would be more my style here. We could see the stock bounce off the 14 level throughout the next 2 months, leaving our hypothetical option player high and dry. Of course, who knows how much that new cheese costs (or the new ovens) … it could lead the stock lower – as could Schultzie.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.