COST Analysis

Costco Wholesale Corp. (COST)

Update 3/24/2017: COST gapped down sharply into unprofitable territory immediately after earnings were published, and continued to fall for a week before recovering a bit and falling into a sideways pattern, still unprofitable. I exited to avoid the risk of early assignment.

Shares declined by 6.0% over 21 days, or a -104% annual rate. The options position produced a -31.7% loss on debit for a -551% annual rate.


 

COST publishes earnings on Thursday after the closing bell.

I shall use the APR series of options, which trades for the last time 50 days hence, on April 21.

Implied volatility stands at 21%, which is 1.8 times the VIX, a measure of the volatility of the S&P 500 index.

COST’s IV stands in the 54th percentile of its annual range and the 68th percentile of its most recent broad movement.

The price used for analysis was $177.95.

Premium: $8.34 Expire OTM iron fly
COST   Odds Delta
Calls
Long 195.00 93.6% 7
Break-even 188.34
Short 180.00 58.1 44
Puts
Short 180.00 41.3% 56
Break-even 171.66
Long 160.00 90.0% 9

The premium is 48% of the width of the position’s wings.

The risk/reward ratio is 1.4:1.

Decision for My Account

I have entered a position on COST as described above. The stock at the time of entry was priced at $178.04.

By Tim Bovee, Portland, Oregon, March 2, 2017

2 thoughts on “COST Analysis

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