Trade Update – Closing $COST Jan Put Spread

by Dan December 16, 2014 10:02 am • Commentary

Since gapping to new highs last week on better than expected fiscal Q1 results,  COST has dropped 7% in a straight line. Prior to the bulk of decline on the morning of the earnings gap we bought a short dated put spread (original post below) to play for a near term re-tracement of a portion of the recent move.  With the broad market getting near term oversold, and the Fed starting it’s two day meeting we are going to close the trade for a healthy short term gain as we could see a broad market reversal at some point in the next day or so.

ACTION – Sold to Close COST ($137.15) Jan 143 / 135 put spread at $4.25 for a $2.55 gain


This morning COST reported their fiscal Q1 result that beat analyst estimates, showing a 7% same store sales increase  vs WMT and TGT both recently reporting .5 and 1.2% comps in the same period (per Bloomberg).  The stock is making new all time highs, up about 1%, but down about 1.5% from the early morning highs.  I am going to keep this really simple (so please read my analysis below from Dec 8th where I detailed my bearish leaning on the stock, largely due to valuation.)

I think that today’s earnings and last week’s better than expected Nov SSS are likely IN the stock here and trading at 28x this year’s expected earnings with expected sales growth of only 7%.  With the news out of the way, I want to now make a near term bearish trade targeting a pull back to the stock’s 50 day moving average around $134.50 over the next 6 weeks.  

Trade: COST ($144) Bought Jan 143 / 135 put spread for 1.70

-Bought to open Jan 143 put for 2.20

-Sold to open Jan 135 put at .50

Break-even on Jan Expiration:

Profits: gains of up to 6.30 between 141.30 and 135, max gain of 6.30 below 135

Losses: up to 1.70 between 141.30 and 143, max loss of 1.70 above 143

Rationale: This is a slightly out of the money put spread that looks for a failure of today’s pop. It won’t take much for this trade to be in the money but obviously the main risk is a continued parabolic move higher. This is a sell the news trade and we’ll know pretty quickly whether we’re right or wrong. We’ll keep a tight leash on the trade to the upside.