Thank goodness it’s Friday. Investors definitely need a break after a crazy week that saw the world’s 13th wealthiest person, Jensen Huang, resign as CEO of Nvidia (NVDA), arguably the world’s most influential AI-related business.
Heading into Friday trading, despite the serious issues surrounding Huang and the California-based chip company, the Nasdaq 100 Index is up 4.8% through the first four days of the week.
More News from Barchart
How could that be? Isn’t this devastating news for tech investors and Nvidia? Only time will tell, but so far, it appears investors see Nvidia’s problems as a possible opening for its competitors and peers.
Interestingly, when you break out tech stocks from the Nasdaq 100, performance over the past four days favours the Nasdaq 100 Technology Sector Index, up 6.5%, over the Nasdaq 100 Ex-Tech Sector Index, up only 2.2%.
Looking at yesterday’s options trading, Starbucks (SBUX), one of the 54 stocks in the Nasdaq 100 Ex-Tech Sector Index, caught my attention. Its volume and unusual options activity were both higher than usual.
One bet, in particular, speaks volumes about that institutions’ bullish view of the coffee chain’s future stock price.
Here’s my two cents’ worth.
Have an excellent weekend.
The Starbucks Options in Question
Starbucks’ options volume on Thursday was 145,713, five times the 30-day average, and the 14th-highest daily volume in the past two years. Impressive.
As for its unusual options activity, it had 14 calls and no puts, with Vol/OI (volume-to-open-interest) ratios between 6.82 and 2.12. While hardly earth shattering–Floor & Decor Holdings (FND)had the top Vol/OI ratio at 194.53–Starbucks’ Dec. 18 $75 call had the highest volume on the day with 29,500 contracts.
Three things stand out: First, the call’s volume was above its 30-day average and made up 20% of the day’s total. Second, the $75 call is deep ITM (in the money). Lastly, the last trade yesterday was at $32.60, leaning slightly to the ask price. The overall put/call volume ratio for all contracts traded yesterday was very bullish at 0.07.
The options flow for the $75 call better indicates the bullish nature of yesterday’s trading. In 12 minutes yesterday, 19 single-leg trades were made, with all but two for 1,500. That’s an institutional bet of $96.3 million.
A Stock Replacement Strategy
At first, the nearly $100 million trade appears to be a Stock Replacement Strategy, where the institution uses deep ITM calls at deltas near 1–16 at 0.9933, 2 at 0.9970, and 1 at 0.9903 — to simulate stock ownership at a fraction of the cost. For example, a delta of 0.9933 means that for every $1 move in Starbucks’ share price, the call option would rise by 99.33 cents, virtually in lockstep with the stock. In this example, it bought exposure to 2,950,000 SBUX shares for 30% of the $317.2 million cost, based on an average share price of $107.52.
By doing this, the institution has freed up significant capital to allocate elsewhere or, at the very least, to lower its financing costs compared to buying the shares outright.
Typically, however, the stock replacement strategy works best using LEAPS (Long-Term Equity Anticipation Securities), where the DTE (days to expiration) is at least 180 days, often longer than a year, up to as much as three years out. This significantly reduces the effect of time decay, which accelerates as the expiration date approaches.
That said, an institution might use a stock replacement strategy despite the short duration for several tactical reasons.
1. A near-term catalyst is a possibility. However, Starbucks reports its Q1 2027 results on Jan. 27, 40 days after the call options expire, so that’s unlikely. Further, its annual Investor Day is held in late January, so that’s also not relevant. The institution may believe it will have a strong Thanksgiving weekend at its U.S. stores, boosting the share price.
2. Given there can be pricing inefficiencies with deep ITM options, it could be that the institution believes that the implied volatility (IV) for the $75 calls is mispriced relative to historical volatility. Yesterday’s 19 trades had IVs between 37% and 46%. That’s higher than it’s typically been in 2026.
3. The institution chooses to take the directional market risk out of the bet by shorting 99 shares of SBUX stock for every 100 call contracts. That brings the delta virtually to zero. At this point, it’s a bet only on IV or mispricing of time value.
Other reasons an institution might make this trade exist, but I won’t dwell on them. At the end of the day, the institution believes the Dec. 18 $75 call options will be worth more than the $32.60 to $33 per share paid for the 29.500 contracts.
The expected move, up or down, to Dec. 18 is 5.56%. Based on the $107.52 share price when the trades were made yesterday, that’s a $5.98 move, resulting in a $5.94 increase in the call value, assuming a delta of 0.9933.
Based on an average call price of $32.65 per share, the return on the calls over 36 days would be 18.2% [$5.94 per share gain in call value / $32.65 average paid per share], or 184.5% annualized.
That’s not a bad payday.
The LEAPS Stock Replacement Strategy
Assuming you want to use a traditional LEAPS stock replacement strategy, I looked at today’s mid-morning trading.
The DTE with any volume furthest out is September 17/2027, 308 days out, so not quite a year, but close enough. Two contracts have traded for both the $90 call and the $115 calls. We’ll go with the $90 call because it’s 15.88% ITM.
As you can see above, the two-contract call trade was $23.33 per share, for a total outlay of $4,666. The delta is 0.7631, while the expected move is 7.76%, not much higher than the Dec. 18 $75 call.
Assuming the expected move happens, your return on the $90 calls would be 27.6% [$106.99 share price * 1.0776 expected move / $23.33 per share options price], or 32.7% annualized.
It’s a good, if not great, return on investment.
On the date of publication, Will Ashworth did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
