Green Mountain option bets raise eyebrows

Fri Mar 9, 2012 6:12pm EST

* Green Mountain put volume surges before Starbucks news

* Green Mountain downside March puts heavily traded

* Trading in Starbucks $52.50 strike calls stand out

By Doris Frankel

March 9 (Reuters) - A heavy burst of bearish option action in Green Mountain Coffee Roasters Inc in the hours before Starbucks announced plans to launch a single-cup coffee and espresso brewer has raised eyebrows among some option market participants.

Green Mountain's Keurig machines are the No. 1 single-cup brewers in the United States. Starbucks Corp, the world's biggest coffee chain, provides coffee refills for Keurig machines under a partnership with Green Mountain and its announcement late on Thursday was seen as a competitive threat to its partner.

Option bets on a big move up in Starbucks shares and on a sharp drop in Green Mountain stock preceded the news.

"The level of aggressiveness that traders early on Thursday came for Green Mountain March downside puts was very suspicious," said Alan Thompson, options market maker at Timber Hill, a division of Interactive Brokers Group. "It raised our eyebrows."

The put buying in Green Mountain "was off the charts into last night's announcement," said Jon Najarian, a co-founder of online brokerage TradeMonster in Chicago, who also noticed very strong buying of upside calls in Starbucks on Wednesday.

"We expect that the regulators will take a deeper look at both Starbucks and Green Mountain ahead of (Thursday) night's announcement," Najarian said.

The U.S. Securities and Exchange Commission, which looks into unusual stock and options activity, declined to comment.

Shares of Green Mountain ended at $62.40 on Thursday. The stock plunged as much as 24 percent in after-hours trade, but regained some ground after Starbucks said on a conference call that it would continue to supply Green Mountain with Starbucks-branded, single-serve coffee pods called K-cups.

When the dust settled, the stock had dropped 16.7 percent. Green Mountain shares on Friday ended 15.72 percent lower at $52.59.

"In Starbucks, there was a small uptick in front-month (option) premiums, as the stock was bid throughout the day going into the news conference," Timber Hill's Thompson said. "But the price action was nothing to the extent of what we saw in Green Mountain."

Shares in Starbucks rose 2.92 percent on Friday to end at $51.84, after setting a new record high of $52.47 earlier in the session.

Option volume in both stocks popped up on Thursday. In Green Mountain, turnover was five times the average daily levels with 80,000 puts traded versus 55,000 calls, Trade Alert said.

"Such heavy bearish flow in Green Mountain shows that option traders were bracing for a big decline in the shares," said Trade Alert president Henry Schwartz.

The March $60 strike puts which expire at the end of next week, were the most popular, trading at an average price of $1.60 apiece. During Friday's session, the premium for those strikes rose to $7 per contract, a profit of 337 percent, Schwartz said. Green Mountain shares were around $62.50 on Thursday when most of those $60 puts were purchased.

Starbucks option volume on Thursday was four times the norm with calls leading puts by 26,000 to 16,000 contracts, data from Trade Alert showed. Buyers of the $52.50 calls in the March and April expirations were active and premiums in both contracts were up between Thursday and Friday.

Schwartz did not view Thursday's flow in these stocks as suspicious since traders knew that the Starbucks action would have a direct impact on Green Mountain.

But he noted the trading of Green Mountain weekly puts stood out on Wednesday. Option volume in Green Mountain on that day consisted of 14,000 puts and 9,200 calls, which was about 82 percent of typical average daily turnover, he said.

Interestingly, traders favored the short-term in-the-money $65 strike puts that expire on Friday after the close with the stock trading at $64.16. The puts had volume of 2,479 contracts with most fetching $1.65 per contract.

Exchange data shows much of the flow was a customer buying those strikes as an opening position, Schwartz said. Those weekly contracts on Friday cost $11.00, with potential paper profits of 566 percent in two days.

"Wednesday's trade in Green Mountain looks suspect but Thursday's flow suggest that option traders were anticipating correctly what was coming down the pike," Schwartz said.