Tomorrow morning COST will report their April sales before the open. The options market is implying only a 1.25% one day move using the May9th 112 straddle. I don’t know about you but that seems a bit cheap to me given investors to shoot first and ask questions later on the slightest bit of bad earnings news (I have 5 stocks on my board down between 15% and 25% plus today alone AOL, FEYE, GRPN, KING & WFM). If I were long COST I would possibly be looking for short term protection into a potentially volatile event, and if I were inclined to play from a directional standpoint, options certainly don’t appear to be pricing to much risk.
The 18 month chart below shows the textbook head and shoulders top formation with the neckline at $110, a level it is quickly approaching again:
The stock’s rejection at the 200 day moving average (yellow line) shows that the bounces off of support are getting weaker and weaker, and that if the stock tested $110 on bad news we could see a quick move down to $105.
That technical set up, coupled with the low price of options into the event is causing me to consider taking a shot, but i am going to be disciplined and look to fade bounce back to resistance. We’re not putting on a trade but if I were to play, this is how I would:
Trade: COST ($112.05) Bought to Open May 9th weekly 112 put for .65
Break-Even on May 9th expiration (Friday):
Profits: below 111.35
Losses: btwn 111.35 and 112 lose up to .65, max loss of .65 above 112