Unusual Activity in Starbuck Put Options Suggests a Stock Price Dip

Unusual activity in Starbucks (SBUX) put options suggests that institutional investors foresee a potential dip in SBUX stock. After all, SBUX stock has risen almost 15% in the last month to $98.66 as of Nov. 28. And since Nov 2, when SBUX stock was at $85.58, the stock has jumped 16.6%. 

This coincides with the release on Nov. 3 of the company's fiscal Q4 earnings ending Oct. 2. The report showed that revenue was up 3% YoY, but it also beat market expectations by $90 million on $8.41 billion, or just 1.0%.

As a result, investors have taken a substantial long position in puts expiring Dec. 16. This is based on an Unusual Stock Options Activity Report (USOA) by Barchart on Nov. 29. This report suggests these investors foresee a significant downturn in the next two weeks.

For example, the USOA Barchart report shows that some investor(s) bought 10,098 puts in SBUX at the $94.00 strike price. This is just 4.72% below today's price. However, the puts have a midpoint price of 99 cents, so SBUX stock has to fall to $93.01 (i.e., $94.00 strike price minus $0.99) or lower for the long-put investors to make any money. 

That means that SBUX stock has to fall at least 5.73% from $98.66 by Dec. 16. to $93.01 in order for the long put holder to make breakeven or start to make money. 

For example, the put options cost almost $1 million (i.e., $0.99 x 10,098 x 100 = $999,702). So, if the stock ends up at $90 by Dec. 16 (down $8.66 from $98.66), the put option will have an intrinsic value of $4.00, or $4,039,200 (i.e., $4.00 x 10,098 x 100). That is an ROI of 304% in just two weeks.

Where This Leaves Investors in SBUX Stock

Investors in SBUX stock should not be spooked by this unusual activity in SBUX stock. Granted, it does tend to put a significant amount of pressure on the stock price. 

On the other hand, the investors in these long puts may already have a large SBUX stock long position. This put option may simply be a way of hedging their downside. For example, a 10,098 SBUX put position represents 1.098 million shares. At $98.66 per share, this means the investor might have close to a $100 million position in SBUX stock (i.e., $1.098m shares x $98.66=$99.627 million). Therefore, buying $1 million worth of long puts represents just a 1% insurance position in case the stock falls in the next two weeks.

The point is this unusual activity could simply be a hedging strategy by a large investor. It does not necessarily represent a conviction that the stock will necessarily take a huge dip - unless it was a speculative position and not a hedging position. 

However, the likelihood of this being a huge gamble that the stock will fall is not highly likely. Therefore, investors should take care to not necessarily repeat this trade unless they are willing to make a huge bet on a 5.7% or higher dip in SBUX stock in the next two weeks.

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