COST Analysis

Costco Wholesale Corp. (COST)

Update 5/26/2017: COST gapped to the outside after earnings were published and then retraced a portion of the rise. I exited a week before options expiration, at 24.9% of maximum potential profit.

Shares rose by 2.0% over one day, or a +746% annual rate. The options position produced a 33.2% yield on debit for a +12,102.63% annual rate.

COST publishes earnings on Thursday after the closing bell.

I shall use the series of weekly options that trade for the last time eight days hence, on June 2.

Implied volatility stands at 19%, which is 1.9 times the VIX, a measure of the volatility of the S&P 500 index.

COST’s IV stands in the 52nd percentile of its annual range and the 94th percentile of its most recent broad movement.

The price used for analysis was $174.63.

Premium: $5.06 Expire OTM  
COST-iron fly Strike Odds Delta
Long 185.00 91.6% 9
Break-even 180.06
Short 175.00 53.7% 48
Short 175.00 46.3% 52
Break-even 170.06
Long 165.00 88.9% 10

The premium is 51% of the width of the position’s wings.

The risk/reward ratio is 1:1.

Decision for My Account

I have entered an order on COST as described above. The stock at the time of entry was priced at $174.50.

By Tim Bovee, Portland, Oregon, May 25, 2017

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