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Costco Earnings Play

Published 10/10/2012, 05:03 AM
Updated 05/14/2017, 06:45 AM
Costco (COST)
COST

Costco (COST) trended higher from a bottom in May and again after a consolidation through August. Running into earnings tomorrow morning it is oscillating around 100 after pulling back from a top at 103 and bounce at the bottom of the Bollinger bands. The Relative Strength Index (RSI) has held in bullish territory but is moving down while the Moving Average Convergence Divergence (MACD) indicator was improving but has stalled.

A neutral bias is shown on the chart. There is support lower at 99.30 and 97.25 followed by 94.40 and 93.25. Resistance higher is at 102 followed by 103.25. It continues to have a Measured Move higher comparable to the May to August move to 109.75 and the 3-box reversal Point and Figure chart carries a price objective to 116. The reaction to the last 6 earnings reports has been a move of about 1.62% on average or $1.65 making for an expected range of 99 to 102.25. The at-the money October Straddles suggest a roughly $2.85 move by Expiry with Implied Volatility at 21% above the historical at 14% but in line with the November at 19%.

Trade Idea 1: Sell the October 100 Straddle for $2.85.
A bet on continued consolidation and that it stays within 97.15 to 102.85, based on the historical move being much less.

Trade Idea 2: Buy the November 95/105 Strangle for $1.47.
Betting that it picks a direction and runs in the next few weeks.

Trade Idea 3: Buy the November 90/95/105/110 Iron Condor for $1.11.
Just capping the Strangle above at a $5 maximum payout and reducing the cost by 25%.

Trade Idea 4: Buy the November 90/95/105/110 Iron Condor and sell the October 95/105 Strangle for $0.75.
Further reducing the cost of the original Strangle. Looking for a muted initial move.

Since this is complicated, look to close out the October options that decline first (i.e. if stock up then close the puts). There will not be a big drop due to shrinking implied volatility since it is not elevated. Time will be what kills the October value. By the way, the premium trades for today were not all this complicated .

Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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