Option Activity Alert: Starbucks, Xerox, Schlumberger

SBUX – Starbucks Corp. – Options traders populating the roaster and retailer of specialty coffee are all-abuzz this morning with the price of the underlying shares fast approaching their current 52-week high of $28.37. Bullish players hoping to see shares in SBUX reach new highs by November expiration are scooping up in- and out-of-the-money calls and selling put options today. Starbucks’ shares are currently up 3.60% to arrive at $28.27 just before 11:25 a.m. in New York trading. Investors are exchanging more than 4.2 calls on the stock for each single put option in action thus far in the session. Bulls picked up approximately 1,900 in-the-money calls at the November $27 strike for an average premium of $1.31 each, while more than 13,000 in-the-money calls changed hands at the higher November $28 strike for an average premium of $0.68 apiece. Investors purchased some 2,300 calls at the November $29 strike at an average premium of $0.47 a-pop. Call buyers at this strike are prepared to make money should SBUX shares rally another 3.9% to trade above the average breakeven price of $29.47 by November expiration. More than 3,800 calls changed hands at the November $30 strike versus previously existing open interest of just 824 lots. Roughly 1,800 of those calls were purchased for an average premium of $0.25 apiece, which positions traders to profit if shares jump 6.6% to surpass the average breakeven point at $30.25 by expiration day. Optimistic options traders also sold 2,400 puts at the November $27 strike to take in premium of $0.74 each. Put sellers keep the full premium received as long as Starbucks’ shares exceed $27.00 through expiration day. They are apparently happy to have shares of the underlying stock put to them at an effective price of $26.26 in the event that the puts land in-the-money at expiration. Starbucks Corp. is slated to report its earnings for the fourth quarter after the market closes on November 4, 2010.

XRX – Xerox Corp. – A sizable short straddle employed on the world’s number 1 supplier of digital printer and document management services indicates one options strategist is anticipating lower volatility in the price of Xerox Corp. shares through January 2011 expiration. Xerox’s shares are up 0.25% this morning to stand at $11.24. The firm reported slightly better-than-expected third-quarter earnings on Thursday morning and raised its outlook for this year and next, but one trader sees shares remaining flat for the next several months. The investor initiated a short straddle, selling 10,000 calls at the January 2011 $11 strike for a premium of $0.83 apiece, and shedding 10,000 puts at the same strike at a premium of $0.65 a-pop. Gross premium enjoyed on the sale amounts to $1.48 per contract. The trader keeps the full premium received on the transaction as long as Xerox’s shares settle at $11.00 at expiration. Some portion of the premium is safe in his wallet if XRX shares trade within the upper and lower breakeven prices of $12.48 and $9.52, respectively. Wayward shifts in the price of the underlying stock outside of these designated points will result in losses for the straddle seller. The investor may choose to unravel the position by buying back the short straddle at some point before expiration. Declines in the stock’s reading of options implied volatility, daily erosion in time value on the options, and stagnation in the price XRX shares will benefit this investor, and could result in profits if the sum of premiums on the January 2011 $11 strike calls and puts is less than $1.48.

SLB – Schlumberger, Ltd. – Shares of the largest U.S. oilfield services company by sales rallied 4.60% this morning to $67.27 after the firm reported that its earnings more than doubled in the third quarter. Schlumberger earned $1.38 per share versus net income of $0.65 in the same quarter last year. Options investors burst straight out of the gate this morning to place near-term bullish bets on the company. Traders picked up roughly 3,700 calls at the November $67.5 strike for an average premium of $1.80 apiece. Call buyers at this strike make money if SLB’s shares rally another 3.00% to surpass the average breakeven point at $69.30 by expiration day next month. One optimistic individual initiated a call spread, buying 1,000 lots at the November $70 strike for an average premium of $0.76 each, and selling the same number of calls at the higher November $72.5 strike at an average premium of $0.29 a-pop. Net premium paid for the spread amounts to $0.47 per contract, positioning the trader to profit if shares rise 4.75% to trade above $70.47 by expiration. Maximum potential profits of $2.03 per contract are available to the spread-trader should Schlumberger’s shares jump 7.8% to exceed $72.50 ahead of expiration day in November. Finally, some cautious investors displayed a preference for SLB puts and picked up just over 1,000 lots at each of the November $65, $67.5 and $70 strikes. More than 1,700 deep in-the-money puts were picked up at the November $70 strike for a hefty premium of $4.00 each. These puts yield profits, or downside protection, should shares drop back below $66.00 by November expiration. SLB’s overall reading of options implied volatility is down 6.4% to stand at 27.65% following earnings.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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