Another downside brew for Starbucks (SBUX)?

The stock price of Starbucks Corporation (SBUX) recently continued its broader losing streak after the company announced its fiscal first quarter earnings. Starbucks beat analysts’ expectations for revenue, but missed earnings per share (EPS). Analysts had expected the company to report EPS of $0.80 and revenue of $7.5 billion for the quarter. Starbucks reported EPS of $0.72 and revenue of $8.05 billion.

The company said rising costs and supply chain constraints are weighing on earnings. A resurgence of COVID-19 meant paying employees more sick leave. The company cut its earnings outlook for fiscal 2022, forcing investors to sell Starbucks shares by 1% the day after the company released earnings. The stock price has continued to decline and is trading in a lower than average range based on historical volatility.

Options traders appear to be placing their bets on further decline in Starbucks shares in the near term. Indeed, while recent trading volumes and open interest for Starbucks are almost split between call and put options, implied volatility and near-the-money options suggest traders are buying selling down while selling up calls.

Key points to remember

  • Traders and investors drove Starbucks’ stock price lower after the earnings release, with the stock falling 1%.
  • Starbucks stock price remains in a downtrend that had broken down slightly ahead of earnings.
  • Starbucks shares recently closed below a thin volume-based sell zone.
  • Implied volatility and open interest seem to suggest that options traders are expecting further downside for Starbucks.
  • Volatility-based support and resistance levels allow for stronger upward movement.

price action

A comparison between technical analysis of the stock price movement and recent options trading activity can give chart watchers valuable insight into general sentiment towards Starbucks stock ahead of the earnings announcement. The chart below illustrates the recent price action of Starbucks stock as of Thursday, February 3.

The chart illustrates the behavior of Starbucks stock price since it reported earnings for the previous quarter. After third-quarter earnings, Starbucks shares floated above and below the 20-day moving average, remaining in an average range. In early 2022, Starbucks shares began an extended downward trend, highlighted by the red arrow. In the week leading up to the results and a few days after, Starbucks shares traded relatively sideways, highlighted in blue. This could mean that traders remain uncertain about the future trend of Starbucks stock price.

The purple bands on this chart are a range of extreme historical volatility formed by 4 standard deviations of 20-day Keltner Channel indicators, which represent price levels that represent a multiple of the average true range (ATR) for the Starbucks stock. The ATR is a standard tool for illustrating historical volatility over time. These ranges could be considered to represent the extreme ranges of option prices.

Relationship with the sector

Starbucks is part of the consumer discretionary sector. This sector includes companies that sell non-essential products and services that consumers can avoid without major consequences for their well-being. Consumer confidence plays a central role in this sector, and its performance can be used as a moderate indicator of sentiment towards inflation. In times of high inflation, this sector tends to fall, as consumers “tighten their belts” on wants versus needs.

The chart below compares Starbucks with the State Street Consumer Discretionary ETF (XLY), the restaurant industry’s main competitor McDonald’s Corporation (MCD) and the ETN Barclays iPath Coffee (JO).

This graph helps highlight the precipitous downward trend that Starbucks and XLY have experienced since the start of 2022. Starbucks has lagged its sector, while the restaurant industry’s main competitor, McDonald’s, has outperformed XLY and Starbucks.

JO tracks only one coffee futures contract at a time, bought two or three months and held until the expiration month. JO provides a viable option for gaining exposure to coffee prices through futures contracts. Starbucks cited higher prices as the main reason for the weaker-than-expected bottom line results. With OJ rising, that could mean Starbucks will continue to incur higher-than-expected costs. JO and Starbucks do not have an explicit inverse relationship, but it is interesting for investors to consider the price behavior of the main product provided by Starbucks.

Volume Profile and Option Outlook

A comparison between price action and options trading can provide insight into how traders and investors feel about a company’s performance in the near future. However, additional price action context in terms of volume could illustrate areas of support or resistance, which could provide context for open interest in options. The chart below illustrates recent Starbucks price action, in addition to a price-based volume pattern on the left side.

This price-based volume model represents the prices at which investors have bought and sold stocks previously. A noticeable amount of buying in the past often means that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling more. When volumes at a given price are low or non-existent, it implies that few, if any, investors need to defend their positions at those levels.

This chart shows how Starbucks stock price movement before earnings fell below a thin volume-based sell zone. This area is highlighted by the red rectangle. If Starbucks stock price were to move higher, this thin area could prove to be an important resistance area on the upside.

Options traders appear to be positioning themselves for the general downward trend in stock prices to continue. Recent trading volumes are nearly even in terms of calls versus puts: 35,000 to 29,000. Despite the slight bullish edge in trading volumes, open interest is slightly bearish as it has 255,000 calls against 264,000 put options. Further analysis is needed.

For February 18, the next monthly option expiration day, the single option with the highest open interest is the $95 put, with 15,000. For at-the-money strikes and a step in either way on either side of the options chain, open interest has 16,000 put options against 2,000 call options. This 8-to-1 ratio reflects incredibly bearish sentiment toward Starbucks in the near term.

Implied volatility also paints an additional picture of this open interest. The implied volatility of the upside calls is decreasing as the open interest increases, suggesting that option traders are taking short positions in these options. Conversely, the implied volatility of downside put options increases as open interest increases, indicating that traders are buying these options.

Wrap

Option traders buy put options and sell call options in anticipation of a future decline in Starbucks stock price. The consumer discretionary sector has significantly underperformed the market lately as investors appear to be shifting to safer sectors due to inflation.

About Mildred B.

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