Friday, April 17, 2015

COST Analysis

The membership-based warehouse retailer Costco Wholesale Corp. (COST), headquartered in Issaquah, Washington, broke below its 20-day price channel on Thursday and traded still lower on Friday, confirming the bear signal.

It was COST's second bear signal in the past year. The first lost 6.2. COST's four bull signals split evenly between winners and loses, for a net loss of 2.5%. The numbers suggest that COST is best traded as a non-directional position.

I shall use the APR4 series of options, which trades for the last time seve days hence, on April 24.

The goal of my trades is to construct direction-neutral positions with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.

[COST in Wikipedia]



Click on chart to enlarge.
COST at 10:45 a.m. New York time, 90 days 2-hour bars
Implied volatility stands at 17.6%, which is 1.3 times the VIX, a measure of volatility of the S&P 500 index. COST’s volatility stands at the top of its most recent rise.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

The Trade

Although the chart was highly directional to the downside in the first hours of trading, the low historical odds of a successful trade argue for a direction-neutral position, which I have proposed below.

The chart range is wide, and I found it impossible to cover it within an acceptable risk/reward ratio. The trade below aims toward producing a probability in the 75% to 80% of expiring out of the money for maximum profit in either direction.

The width of the spread is only $4. By comparison, the price in the first 90 minutes of trading covered $3.63.  COST's average true range is $2.12, a bit more than half of the width of the spread.

I find it important to remember that his is not an earnings play -- COST doesn't publish until May 27 -- and so there's no reason to expect wild moves. So this sort of spread isn't necessarily a deal killer.

Iron condor short the $146 calls and long the $147 calls,
short the $141 puts and long the $140 puts
sold for a credit and expiring April 25
Probability of expiring out-of-the-money


The risk/reward ratio stands at 1.8:1

Decision for My Account

After some soul-searching I'm declining to take the trade. It may be a reasonable trade, and I'll look at it again when earnings are announced in May. Meanwhile, it is earnings season, and I suspect that I'll be able to put those funds to better use with earnings plays next week.

-- Tim Bovee, Portland, Oregon, April 17, 2015


My volatility trading rules can be read here.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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