Update – Costco (COST) Earnings Moves

by CC March 3, 2017 2:00 pm • Trade Updates

Yesterday we previewed Costco’s fiscal Q2 earnings and detailed two trade ideas, a hedge versus long shares, and a stock replacement/alternative that could be used in lieu of stock for more upside but defining risk in case of a large move lower on the event. With the stock down more than 4% on the event, let’s check in on those ideas. First the hedge because it expires today. Here was the overlay from yesterday for long holders:


vs 100 shares of COST (177.50) Buy the March 3rd (weekly) 175/167.50 put spread for 1.40
  • Buy 1 March 3rd 175 put for 1.70
  • Sell 1 March 3rd 167.50 puts at .30

With the stock 170.25 today, the hedge is worth about 4.65. In other words, it protected 3.25 vs the move of about 7.75. Not bad, if the stock had gone lower it would have protected all the way to 167.50. Since it expires today, you take of the hedge here, it was worth it for long holders.

The other trade idea was to replace stock entirely with defined risk. Here was the trade idea:

Stock Replacement/ Alternative

COST (177.50) Buy the March 177.5/187.5/197.5 Call Fly for 2.50
  • Buy 1 March 177.5 call for 2.45
  • Sell 2 March 187.5 calls at .50 (1.00 total)
  • Buy 1 March 197.5 call for .05

This is worth only about .20 today and can be closed. For those that sold stock and replaced with this position it worked as intended, losing 2.20 versus the 7.75 losses in the stock. IT can be closed and replaced with stock for longer term bulls. For those that bought for a continuation of the breakout it can simply be closed for less losses than the stock outright. For those wanting to continue defined risk long exposure with the stock now lower, once closed it can be rolled. The April 170/180/190 call fly makes sense as it limits risk to similar, just above $2.50, with potential for up to almost 7.50 if the stock regains its footing and heads towards 180.