COST Analysis

Update 6/4/2015: As expiration approached, COST was moving swiftly toward the lower boundary of the profit zone. I exited my position in order to preserve my gains.

Shares declined  by 2.6% over seven days, or a -136.8% annual rate. The options position produced a 56.4% yield on debit, for a +2,941% annual rate.

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The big-box discount chain Costco Wholesale Corp. (COST), headquartered in Issaquah, Washington, publishes earnings on Wednesday after the closing bell.

I shall use the JUN1 Weeklys series of options, which trades for the last time nine days hence, on June 5.

[COST in Wikipedia]

COST

Ranges

Click on chart to enlarge.

COST at 10:35 a.m. New York time, 90 days 2-hour bars

Implied volatility stands at 19.5%, which is 1.4 times the VIX, a measure of volatility of the S&P 500 index. COST’s volatility stands in the 76th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	148.39	152.81	154.23
Lower	139.57	135.15	138.91
Gain/loss	3.1%	6.1%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

I've skewed the zone of profitability somewhat to the downside in order to account for the general bearish tone of the market, leaving $138 at the top of the one standard deviation range unprofitable. Moreover, 43 cents of the downside is also beyond the profit zone.

It's not an optimal position. However, I ought to get a bump from the collapse in volatility after the earnings announcement, and volatility itself, while high relative to its own past, is in absolute terms somewhat on the low side, which ought to help the chance that the price will stay within the profit zone.

Iron condor short the $147 calls and long the $149 calls,
short the $140 puts and long the $138 puts
sold for a credit and expiring June 6
Probability of expiring out-of-the-money

JUN1	Strike	OTM
Upper	147	70.3%
Lower	140	76%

The risk/reward ratio stands at 1.4:1. The premium is $0.78 ($0.50 for the calls and $0.28 for the puts), with the stock at $144.42.

Decision for My Account

I've opened a position as described above.

-- Tim Bovee, Portland, Oregon, May 27, 2015

References

My volatility trading rules can be read here.


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Disclaimer

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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Based on a work at www.timbovee.com.