Unusual Options Activity Points to a Big Bet on Starbucks (SBUX)

Coming off the back of a strong earnings performance, Starbucks (SBUX) on paper seems poised to get its market performance back on a positive trajectory. However, major headwinds such as China’s draconian zero-COVID policy weighs on SBUX stock, leading to concerns about forward viability. Nevertheless, options traders seem particularly enthused about the coffeeshop giant, diving heavily into its derivative contracts.

First, let’s discuss the fundamentals. Last week, for its fiscal fourth-quarter earnings report, Starbucks delivered earnings per share of 81 cents, beating out Zacks Consensus Estimate for EPS of 73 cents. In the year-ago period, Starbucks posted earnings of $1 a share. These figures are adjusted for non-recurring items.

According to Zacks, over the last four quarters, Starbucks surpassed the consensus EPS estimate two times.

On the revenue front, the coffeehouse stalwart posted $8.41 billion on the top line. Based on Zacks’ estimate, Starbucks came in just shy of the sales target. However, analysts surveyed by Refinitiv pegged fiscal Q4 sales to come in at $8.31 billion. Therefore, against this favorable backdrop, Starbucks beat the top-line estimate by 1.2%.

Back home, the coffeeshop “reported same-store sales growth of 11%, which was the result of people spending more on average and a slight uptick in traffic,” per a CNBC report. “Prices were also up 6% from a year ago, but executives said they don’t plan to raise prices anymore for the time being.”

While an overall positive development for SBUX stock, the glaring headwind centered on China and its restrictive pandemic-related policy. Same-store sales in the country – which represents Starbucks second-largest market – declined 16% in the quarter.

Although a tough ecosystem, traders apparently saw more positives than negatives, bidding up SBUX stock in the derivatives arena.

Huge Spotlight on SBUX Stock

Following the ringing of the closing bell for the Nov. 7 session, SBUX stock captured the spotlight in terms of unusual options activity. Two call options occupied the number one and number four slots regarding higher-than-normal trading dynamics.

Specifically, traders targeted the $115 calls with an expiration date of March 17, 2023, and the $105 calls, also with the same expiration date (129 days from the time of order placement). For the former transaction, volume reached 86,955 contracts against an open interest reading of 330. The bid-ask spread as represented by the midpoint price (88 cents) came out to 3.41%.

Regarding the latter transaction, volume hit 86,982 contracts against open interest of 1,064. The bid-ask spread as represented by the midpoint price ($2.29) came out to 2.18%.

Perhaps not surprisingly given the recent positive earnings results, the current sentiment in the options arena for SBUX stock is bullish. According to data from Barchart.com, the put/call open interest ratio is 0.44. Typically, the delineation between bullish and bearish sentiment is 0.70, with figures below this threshold indicating that more traders are buying calls than puts.

When stacked against analysts’ opinions, the assessment toward SBUX stock remains little changed. Three months ago, Wall Street experts pegged Starbucks as a consensus “moderate buy.” This rating broke down between 12 strong buys and 13 holds.

In the current month, analysts have the same consensus rating, “moderate buy.” This breaks down to 11 strong buys and 13 holds.

China Woes and the Return to Normal

Late last week, rumors circulated that Chinese authorities may relax its zero-COVID strategy. Immediately, several publicly traded companies – including SBUX stock – bounced higher on the possibility. As the world’s second-largest economy, China’s resumption of normal activities isn’t just a matter of domestic concern but international as well.

Unfortunately, the latest data suggests that those rumors lacked substance. With a spike in new COVID-19 cases, there are no signs that authorities will reduce pandemic-related restrictions. If anything, increased limitations on mobility are likely in the near term, thus boding poorly for SBUX stock.

However, it’s also fair top point out that China is primarily hurting itself through these restrictions. At some point, then, Beijing must fade out these economically deleterious policies, which should augur well for SBUX stock in the long run.

Also, the cooling labor market back home has shifted some bargaining power from employees to employers regarding the return-to-office debate. Should more people return to the physical workforce, this too could be advantageous for SBUX stock. After all, a caffeine fix has always been a traditional pick-me-up of worker bees managing the drudgery of the nine to five.

Overall, then, the fundamental case for long-expiry call options for SBUX stock makes plenty of sense. While domestic and international headwinds are still in place, they could give way to becoming tailwinds, at least as far as Starbucks stakeholders are concerned.

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