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Starbucks Option Traders Brace for a Longer-Term Pullback

SBUX April 45-strike put saw buy-to-open activity on Thursday

by 12/14/2012 10:35 AM
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Puts were in order on Starbucks Corporation (NASDAQ:SBUX - 53.47) Thursday, with nearly 8,600 contracts crossing the tape. By comparison, fewer than 6,400 calls changed hands. The most active strike on the day was SBUX's April 45 put. All of the 1,955 contracts traded at the ask price, implied volatility ticked higher, and open interest rose overnight -- indicating new positions were created.

By buying these deep out-of-the-money puts to open, traders will profit with each step below $44.23 (the strike minus the volume-weighted average price [VWAP] of $0.77) SBUX takes through the close on Apr. 19, when these puts are set to expire. This breakeven level represents a 17.3% slide from current levels. Meanwhile, at the time these trades were initiated, this put held a delta of -16, meaning there is a slim 16% chance these bets will land in the money by April expiration. Should the stock fail to breach the $44.23 mark over the next few months, the most these traders can lose is the initial premium paid.

As Elizabeth Harrow noted on Tuesday, the withstanding trend in the options pits has been toward puts. During the course of the past 10 sessions, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 120 puts for every 100 calls on SBUX. This put/call volume ratio of 1.20 ranks higher than 92% of other such readings taken over the last 52 weeks, suggesting puts have been scooped up over calls at a near annual-high clip in recent weeks.

On the charts, SBUX has been a solid performer, which makes this rush toward puts a bit puzzling. In addition to outperforming the broader S&P 500 Index (SPX) by more than 11 percentage points over the past two months, the stock has added more than 22% year-over-year. From a longer-term perspective, SBUX has enjoyed a steady lift from its rising 80-week moving average since June 2009, and this trendline served as a formidable foothold during the equity's most recent pullbacks.

Keeping the stock's technical tenacity in mind, the uptick in put volume could simply represent shareholders protecting paper profits against a potential plunge. With the equity's Relative Strength Index (RSI) of 62 teetering near overbought territory, a near-term consolidation isn't out of the question.


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