COST Earnings Updates

by riskreversal December 9, 2016 11:35 am • Trade Updates

On Wednesday, we previewed Costco’s fiscal Q1 earnings. The stock is up on the report and now near the 160 level we were looking at on the upside. I wanted to check back in on the trade ideas we detailed in that post and talk about trade management. The first trade idea was for those already long the stock and looking to add a little yield. Here was the trade:

Over-write for long stock holders

vs 100 shares of existing COST ($152) stock, sell the Dec30th 160 calls at .70

With the stock more than $6 higher, the Dec30th 160 calls are about 1.65 here. A .95 loss vs the nearly $6.50 in gains in the stock. That’s not bad and this is the perfect scenario if the stock settles in here as those will quickly lose value over the next few weeks as long as the stock is below 160. Patience will pay off here with a stop at 160 in the shares to close the short call and possibly roll out and up at that point.

The second trade idea was a stock alternative. Here is how that looked:

Stock Alternative

COST ($152) Sell 1 Dec30th 143 put vs Buying 1 Dec 30th 152.5/160 call spread for $1.60
  • Sell 1 Dec30th 143 Put at .75
  • Buy 1 Dec30th 152.5 call for 3.00
  • Sell 1 Dec30th 160 call at .65

With the stock 158 this trade is worth about $5, so nice gains of more than $3. Intrinsically this trade is worth about 6.00, so there are some profits left to capture for those that want to be patient as the 160 calls still have some premium in them. The issue from a trade management standpoint is that this is nearly 50 deltas here so movements up and down in the stock will have a fairly significant effect on profits. For those still looking to target 160, the best thing to do is to keep a tight stop below where you’d be willing to close and be happy with the profits. For those that were just in in for a move higher on the event, the trade can be closed now for a nice profit.

The final trade idea was a hedge overlay vs existing shares:

vs 100 shares of COST (152) buy the Dec 148/140 put spread for 1.05 cents
  • Buy 1 Dec 148 put for 1.25
  • Sell 1 Dec 140 put at .20

This is basically worthless, but that’s the idea on a hedge. It protected against a decline on earnings and with the shares $6.50 higher, cost just over a dollar. Those sorts of event hedges can be made up for overtime with over-writes (upside call sales) on non event months in between (e.g., the Jan 165s can be sold at 1.05 here) and allows for long term management, reducing risk into events. That strategy can be applied to most holdings in a portfolio.