COST Analysis

Costco Wholesale Corp. (COST)

Update 12/15/2017: COST’s earnings beat the Street estimate of $1.35 per share by 7.%, coming at $1.45. Shares rose in overnight trading by more than $10, then at the opening bell dropped off by about $2 and went into a sideways trend. I exited at 1.7% of maximum potential profit.

Shares rose by 3.6% during my holding period of less than a day, for a +1,316% annual rate. The options position produced a 1.7% return for a +624% annual rate.

Going into the trade COST had a neutral (3) rank from Zacks, with an earnings surprise predictor (ESP) of 1.39%. The shares uptrend was strong, with an average directional index (ADX) of 47.9, which is at the peak of the most recent broad movement. The DI gap between the directional indices (+DI, -DI) was 26.4.

From the pre-earns close to the end of the first trading day after the announcement, COST rose $6.20, slightly more than the average movement of $6.14. well below the maximum move of $9.98 and greater than the central tendency of $5.73.

The expected price move, with 85% accuracy, of $6.14 was eclipsed by the actual maximum move of $8.82 and broke free of the $6.55 upside profit zone.

Click here for the associated shares trade results.

COST publishes earnings on Thursday after the closing bell.

I shall use options that trade for the last time eight days hence, on Dec. 22.

Implied volatility stands at 24%, which is 2.4 times the VIX, a measure of the volatility of the S&P 500 index.

COST’s IV stands in the 93rd percentile of its annual range and the 89th percentile of its most recent broad movement.

The price used for analysis was $187.28.

I shall direction-neutral iron fly as the structure for the position. The metrics argue for a bull play, but the chart for the last two weeks suggests topping, which argues for protection on the downside.

Premium: $5.95 Expire OTM
COST-iron fly Strike Odds Delta
Long 197.50 88.3% 13
Break-even 193.45 76.0% 25
Short 187.50 56.0% 46
Short 187.50 43.7% 54
Break-even 180.95 74.0% 24
Long 175.00 87.6% 11

The premium is 52.9% of the width of the position’s wings.

The risk/reward ratio is 1.1:1.

The zone of profit in the proposed trade covers a $5.95 move to the upside and a $6.55 move to the downside. The biggest immediate move after each of the past four earnings announcements was $9.98, and the average was $6.14. After eliminating the maximum and minimum post-earnings movements, the central tendency is $5.73.

The expected move covering 85% of occurrences is $6.14, which is 19 cents beyond the upside profit zone and 41 cents within the downside zone.

The bid/ask spread is 9.1%.

Decision for My Account

I have entered a position on COST as described above. The stock at the time of entry was priced at $186.17. I also did a shares  trade on COST.

By Tim Bovee, Portland, Oregon, Dec. 14, 2017


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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