Shares of Starbucks Corporation (SBUX) continued to fall recently after the company reported first-quarter earnings. Starbucks beat analysts' revenue estimates, but missed earnings per share (EPS). Analysts expected the company to report $0.80 EPS and $7.5 billion in revenue for the quarter — Starbucks reported $0.72 EPS and $8.05 billion in revenue.

The company said rising costs and supply chain constraints are affecting profits. The resurgence of COVID-19 means paying more employees to take sick days. The company lowered its earnings estimates for fiscal 2022, causing investors to sell off 1 percent of Starbucks stock the day after the company reported earnings. Shares continued to fall and trade in a below-average range, based on historical volatility.

Options traders appear to be betting on further declines in Starbucks stock in the near term. This is because while recent trading volume and open positions in Starbucks are almost split between calls and puts, the implied volatility and proximity to currency suggests traders are selling calls while buying downside puts.

Key Points

  • Traders and investors bid up Starbucks shares after the earnings announcement as the stock price fell 1%.
  • Starbucks’ share price remains in a downtrend, pausing slightly before earnings.
  • Starbucks shares recently closed below weak territory based on volume.
  • Implied volatility and open interest seem to indicate that options traders expect Starbucks to fall further.
  • Volatility-based support and resistance levels allow for a stronger uptrend.

Price fluctuations

A technical analysis of the stock price action compared to recent options trading activity provides K chart watchers with insight into the overall sentiment of Starbucks stock ahead of earnings announcements. The chart below illustrates the recent price action in Starbucks stock as of Thursday, February 3.

SBUX Recent Price Trend

This K-line chart illustrates Starbucks' stock price action since reporting earnings for the previous quarter. After the third quarter earnings report, Starbucks stock price floated above and below its 20-day average, staying within its average range. In early 2022, Starbucks stock began a long-term downtrend, highlighted by the red arrow. In the week prior to earnings and the days following, Starbucks stock consolidated relatively sideways, highlighted in blue. This could mean that traders are still unsure of the future trend in Starbucks stock.

The purple band on this K chart is the extreme historical volatility range formed by the 4 standard deviations of the 20-day Keltner Channel indicators, which depict price levels representing multiples of the Average True Range (ATR) for Starbucks stock. ATR is a standard tool used to illustrate historical volatility over time. These bands can be thought of as representing the extreme ranges of option pricing.

Relationship with the department

Starbucks is part of the non-essential consumer goods sector. The sector includes businesses that sell non-essential products and services that consumers can avoid without any significant impact on their well-being. Consumer confidence plays a central role in the sector, and its performance can be used as a modest indicator of inflationary sentiment. In times of high inflation, the industry tends to fall as consumers "tighten their belts" compared to demand.

The chart below compares Starbucks to State Street's Non-Essential Consumer Goods Sector ETF (XLY), top restaurant competitor McDonald's Corporation (MCD) and Barclays iPath Coffee ETN (JO).

Comparison of SBUX, XLY, MCD and JO

This K chart helps highlight the sharp downtrend that Starbucks and XLY have experienced since the beginning of 2022. Starbucks is lagging its industry, while top restaurant competitor McDonald's is outperforming both XLY and Starbucks.

JO tracks a single coffee futures contract at a time, purchased for two or three months and held until the expiration month. JO is a viable option for exposure to coffee prices through futures. Starbucks cites higher prices as the main reason for lower than expected profits. As JO rises, this could mean that Starbucks will continue to incur higher than expected costs. There is no explicit inverse relationship between JO and Starbucks, but it is worthwhile for investors to keep an eye on the price behavior of the key products Starbucks offers.

Trading Volume Overview and Options Outlook

Comparisons between price action and options trading can provide insight into traders' and investors' perceptions of a company's recent performance. However, in terms of volume, further context of price action can indicate areas of support or resistance, which can provide context for options open positions. The chart below shows Starbucks' recent price action, along with the price-based volume pattern on the left.

SBUX recent price action, and price-based volume patterns

This price-based volume model describes the prices at which investors have previously bought and sold stocks. Past heavy buying usually means that the investor wants to defend his position at the same price by buying more shares or at least not selling any more shares. When the volume at a given price is low or non-existent, this means that few investors need to defend their positions at these levels.

This K-line chart highlights how Starbucks' pre-earnings stock price action fell below a thin sell zone based on volume. This area is highlighted by the red rectangle. This area of weakness could become a significant area of upside resistance if Starbucks stock rallies.

Options traders seem to be bracing for a continued downward trend in overall stock prices. Recent trading volume is almost flat in calls and puts: 35,000 to 29,000. Despite the slightly bullish trading volume, the open position is slightly bearish as it stands at 255,000 calls and 264,000 puts. Further analysis is needed.

For February 18, the next monthly options expiration date, the single highest position is in $95 puts, or 15,000. For currency strikes on either side of the options chain and a step in either direction, the open interest features 16,000 puts compared to 2,000 calls. This 8-to-1 ratio reflects the incredible pessimism about Starbucks in the short term.

Implied volatility further depicts this open position as well. The implied volatility of the upside call options is falling while the open positions are rising, indicating that options traders are shorting these options. Conversely, as positions increase, the implied volatility of the downside puts is also rising, indicating that traders are buying these options.

Summary

Options traders are buying puts and selling calls in anticipation of future stock price declines in Starbucks stock. The non-essential consumer goods sector has lagged the market considerably recently as investors appear to be shifting to safer sectors due to inflation.