Trade Update $COST: Closing Short Term Bearish Play for a Gain

by Dan February 26, 2013 1:45 pm • Commentary

Trade Update Feb 26th, 2013 at 1:45pm:  COST has remained amazingly resilient since Feb 15th when I bought March 100 puts.  During that time period, the SPX is down about 2.2%, while COST down about the same, certainly not beta!    The trade was predicated on that ominous WMT email, and since then WMT has been up about 3%, which included earnings and guidance that were not as bad as originally expected from said email.  The stock appears to be sitting on an important near term support level,  and given the relative strength it appears to be a market call at current levels whether it breaks or not.  I am going to take profits and look to pick on a weaker name in a weaker sector from the short side.

Action: Sold to Close COST ($99.63) March 100 Puts at 1.95  for a .75 gain.





Original Post Feb 15th:  New Trade $COST – Wal-Mart’s Warning to the World

Wal-Mart’s executive emails were just leaked 30 minutes ago, and the company’s management didn’t paint a pretty picture of the U.S. consumer to start 2013.  Apparently, February sales are a “total disaster” at the retail giant’s stores, and management is blaming the payroll tax hike on the poor performance.

Lo and behold, some of that fiscal tightening is starting to have an impact.  With the sequester likely to hit in about a month, more industries are about to feel the impact of that painful adjustment.  Here’s the thing – if the market seemed prepared for these obvious impacts, then they’d be non-events.  But the market is at the height of complacency, so any little blip in the road can get magnified when everyone’s on the crowded vehicle known as the bullish bus.

Wal-Mart’s stock is already down 3% to reflect the news, but its slightly more up-market friend, COST, is down less than 0.5%.  Add to that very cheap implied volatility pricing even though the company reports earnings on March 12th, and put options look like a great risk/reward here.  Finally, the chart is of a stock that can’t seem to rally over the past month, even in a strong tape:


COST 1 yr chart from Bloomberg
COST 1 yr chart from Bloomberg

The 200 day ma around 96 seems achievable if earnings in March disappoint.

Vol is cheap especially considering the company will report in March (IV30 red, HV30 blue):

Screen Shot 2013-02-15 at 12.33.24 PM
from LiveVol Pro


TRADE: COST ($101.85) Bought the Mar 100 Put for 1.20

-Bought 1 Mar 100 Put for 1.20

Break-Even on March Expiration:

-Profits below 98.80

-Losses up to 1.20 between 98.80 and 100, max loss of 1.20 above 100

Trade Rationale:  VOL too cheap with event….will look to spread….