Monday, September 28, 2015

COST Analysis

Update 11/6/2015: I exited COST for a loss four days before  the stock went ex-dividend in order to eliminate the chance of an assignment of options deep in the money. \

The COST trade went bad, as have many of my trades from that period, with the rapid market revival after the Aug. 24 China Crash. The chart at entry had shown a bounce downward below resistance, but it resumed its rise a week later.

Shares rose by 8.0% over 39 days, or a +83% annual rate. The options position produced a 54.2% loss on debit, for a -507% annual rate.

The membership-based warehouse retailer Costco Wholesale Corp. (COST), headquartered in Issaquah, Washington, publishes earnings on Tuesday before the opening bell.

[COST in Wikipedia]


I shall use the NOV series of options, which trades for the last time 53 days hence, on Oct 20.


Click on chart to enlarge.
COST at 11:30 a.m. New York time, 30 days hourly bars
Implied volatility stands at 24.7%, which is 9/10ths the VIX, a measure of volatility of the S&P 500 index. COST’s volatility stands in the 57th percentile of its annual range.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

In constructing a trade, I've given preference to overing the maximum range of movement post-earnings of the past four announcements, providing a greater premium and lower risk at the cost of a narrower profit zone.

Iron condor, short the $150 calls and long the $155 calls,
short the $135 puts and long the $130 puts,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money


The premium is $1.94, which is 28% of the width of the position’s wings.The stock at the time of purchase was priced at $144.27.

The risk/reward ratio is 1.5:1.

The zone of profit in the proposed trade covers a $5.00 move either way. The biggest immediate move after each of the past four earnings announcements was $4.00, and the average was $2.85.

Decision for My Account

I've opened a position in COST as described above.

-- Tim Bovee, Portland, Oregon, Sept. 28, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, 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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