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BEHIND THE MONEY: Options Market Foretold Starbucks Earnings Miss Today

Tuesday, 11 Nov 2008 | 4:43 PM ET

Here's what we didn't get to in last night's show...

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Heavy options action in Starbucks at the start of the month foreshadowed the ultimate earnings miss and decaffeinated forecast out of the coffee chain after the bell yesterday, according to Pete Najarian, FM Trader and co-founder of OptionMonster.com. If you look at the chart, Starbucks shares began to go on a nice run at the end of October amid an interview in the Wall Street Journal where CEO and Founder Howard Schultz told the paper that he believed the company's sales may have hit bottom in September.

Options players weren't buying that, so they started to aggressively buy puts on Nov. 3 after that run. (A put option gives the holder the right to sell a stock at a certain price. It's typically a bet on the stock going lower.) Najarian saw this spike in activity and bought the puts as well. This "piggy-back" technique has been perfected by Pete and his brother Jon, helping them get ahead of such notable events as the buyout of Hilton Hotels late last year.

This time, the put buyers were likely making a bet on two things: One, that October sales figures to be released that week from retailers including Target would be abysmal. And two, Starbucks fiscal 4th-quarter earnings would not quite live up to Schultz's forecast.

Sure enough, October sales figures for the industry ended up being the worst in 8 years and Starbucks profit last night fell more than estimated. The chain also said customer visits decreased for a fifth-straight quarter.

After about a 20 percent drop since Nov. 3, the shares were down another 2.5 percent as of 10:04 a.m in Nasdaq trading today, making a pretty penny for the put holders. (Disclosure: Pete sold his puts just before the earnings came out yesterday.)

If you want to play along with Pete some more, check out his final trade from last night here.

And oh yeah..the reason we didn't get to this segment last night was because the chart froze up on us while we were testing it during the commercial break. We had planned for it to be a part of a new segment we're doing called, "Instant Replay". The segment entails one of the traders taking you inside his or her mindset during a hot trade they had that day. It uses a time progression intraday chart that we can stop and pause. It's a segment that fits our "post-market show" mentality perfectly. You could see Terry Bradshaw up there doing it with us. Look for that segment each night this week.

What else did you miss last night? Well, we wanted to do a more elaborate segment laying out the "grifting arts" techniques that Jeff Macke, FM Trader and founder of Macke Asset Management, has been alluding to for the last few weeks. This credit crisis has gotten so dire that, according to Jeff, he's starting to teach his kids the "grifting arts", ala carnies and hoboes and other unsavory figures. Look for this to be a fun, recurring segment of ours. We had our graphics department make up an animation for "The Grifting Arts" involving 3 cups on a tray and a little ball. Let's hope this market doesn't actually force us to resort to such methods.

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