Shares of Starbucks (SBUX) have under-performed in 2016, down about 7.5%, and down about 13% from their 52 week (and all time highs) made in October of 2015. The stock is merely taking a breather after gaining 1500% from its financial crisis lows in 2008, but the recent series of same store sales comp misses in China suggest that the company’s emerging market growth expectations may be a tad overzealous given the headwinds to global growth.
There was a trade in the options market that caught my eye in the name today. When SBUX was trading $55.70 there was a buyer of 6500 of the July 22nd weekly 53 / 50.50 put spreads. The trader paid 46 cents to open. This trade breaks-even about 5.5% on the downside at $52.54. It has a max gain of $2.04 at $50.50, down about 10% from the trading level.
There were a couple things that stuck out at me about this trade.
First, the choice of July 22nd weekly expiration. This is clearly targeting the company’s fiscal Q3 results scheduled for July 21st after the close. The obvious conclusion would be that this is either protection for a long into earnings or an outright bearish bet. Either way it is a fairly tight put spread.
Second, the strikes are odd, well below the market. The long strike makes sense as the break-even (strike less premium paid) appears to line up almost in line with the stock’s 2016 low made in February at $52.50:
But If i were willing to commit capital to out of the money premium solely for an event, I’d likely look to leave myself a bit more room in the event of a massive breakdown. A look at the chart since the stock’s late 2008 low shows the massive air-pocket below the February lows, down towards the August 24th, 2015 flash-crash low near $40, which also happens to be fairly massive technical support for other reasons. Obviously the uptrend off of the 2008 lows, but also the early 2015 breakout level that saw the stock gain more than 50% from that point:
If I were looking to protect a long, after the stock’s poor relative strength of late, and what appears to be an increasingly dicey technical set up with an uncertain outlook in key growth areas, I would have looked for a wider put spread. Or I would have looked to merely own a put at the breakdown level and risk what I am willing to lose and not cap potential gains or protection.