Name That Trade – COST: Exit the Triangle of Death

by Dan May 7, 2014 3:33 pm • Commentary

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:

COST chart since Jan 1, 2013 to present from Bloomberg
COST chart since Jan 1, 2013 to present from Bloomberg

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