Options traders position for quick comeback in coffee king
08/04/17

An iconic brand is coming off a historic selloff, and some traders are looking for a fast rebound.

Coffee giant Starbucks (NASDAQ: SBUX) was met with anything but hugs and kisses following its most recent quarterly report on July 27. Top-line revenue and same-store sales both missed estimates. Traction from its loyalty program slipped and management sounded alarm bells about retail traffic.1

SBUX lost more than 9 percent by the time the dust settled. Not only was it the company’s biggest drop in five years, it was also a rough welcome for incoming CEO Kevin Johnson.

But that was then. Yesterday the buzz was pointing in the opposite direction as options traders amassed almost 16,000 4-August 56 calls for $0.14. Most of them priced just minutes after the opening bell, followed by a quick sprint higher in the shares.

Calls fix the price where investors can purchase a security, allowing them to profit from a relatively small rally with limited capital at risk. But if no move occurs they can turn worthless quicker than you can say “Mocha Frappuccino”. That’s especially true with yesterday’s contracts.

Starbucks (SBUX), 8/9/16-8/3/17

Source: OptionsHouse by E*TRADE

After all, they expire this afternoon. They’ll double in value if SBUX advances less 1 percent to $56.28 and triple if it inches up to $56.42. Breakeven is at $56.14. But under $56, and… well, read what it says above. You know, the part about “turning worthless”. 

While last week’s selloff was pretty epoch, some analysts insisted the mug remains half full. They said the longer-term growth story remains intact and see room for improvement as management debugs mobile-ordering. Then there’s China. While many U.S. companies have failed to gain a toehold in the world’s biggest country, SBUX did manage to grow comps there 7 percent last quarter. So far, so good, said many on Wall Street.2

Chart watchers also found some reasons for hope in their technical playbook. They noticed how the stock bounced around $54 in mid-2016, and again at that level in February and March. The same price came into play again following last week’s selloff. Technicians have a word for that: “Support.”

Bottom line: This afternoon value hunters are looking for a quick jolt higher in SBUX following a gut-wrenching drop.

 

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1. Reuters: Starbucks shares tumble on fears of slowing U.S. growth. 7/28/17. CNBC: Starbucks earnings in-line with Street estimates, closing all Teavana stores. 7/27/17.

2. Benzinga: Several Analysts Still Remain Bullish On Starbucks, Despite Disappointing Earnings Call. 7/28/17. Starbucks (corporate press release): Starbucks Reports Record Q3 Financial and Operating Results; Company Announces Strategic Actions to Advance Growth Agenda and Increase Returns. 7/27/17.