Costco (COST) options were active ahead of earnings to be reported before the open tomorrow morning, call volume 4X daily average and put volume near 4X daily average. There were a couple large trades on the day, early in the day the March $75/$80 "Call Stupid" Spreads traded around 2,500 contracts, both legs pricing below the bid. The March $75 calls traded 5,401 and $80's traded 3,483 on the day, well exceeding open interest, fresh action that pushed March IV 12% higher. Also, back on February 22nd a block of 20,000 March $70 puts was rolled out to the July $70 puts, which remain in Open Interest.
Costco shares are now trading in a tight $73 to $75 range after finally breaking clear of the 2008 top. The $32B retailer trades 19.4X earnings, 0.4X sales and 21.17X cash flow, and should be boosted from gasoline sales. Costco is a superb operator and generally reacts well on earnings, but after recently topping out at $75 is could pull back to the 50 day EMA at $72.42 where it tends to bounce, but expect buyers to bring it back from that level. Shares made a bearish ADX cross on 2/25 and the downtrend does have potential to accelerate from here.
This brings me to the ratio put spread that traded today at 2:14pm on the CBOE. The trader bought the March $75/$72.50 1X2 ratio put spread for 1,500X3,000 contracts at a $0.05 debit. The trade is bearish volatility, but actually positive Delta (Delta 0.14), as the $75's will hold value if shares head higher while the $72.50's will rapidly lose value, and the spread will widen. The trader makes maximum profits with shares sitting on the $72.50 level come options expiration, and is profitable in the $70 to $74.95 range come expiration, although the trader would likely exit the trade early if the shares hang in the $75 range next week, the trade a positive Theta trade as well. The trade comes with Costco's IV at more than a 6 month high, which ran up 40% in the past 3 weeks. With a small $0.05 outlay the trader can bank big time percentage gains on this trade, and it is fairly low risk, only getting the trade in trouble if shares were smashed below $70, which seems unlikely for a well respected name trading at fair valuation. (The P/L View is Below Using ThinkorSwim's Analyze Function)
My chart of CostCo is Below along with IV, HV, ATR Wilder, CCI, and Relative Volatility Index (This Likely Looks Confusing, but Settings I Have Gotten Used To)
Time will tell if this trade works or not, but as long as it hangs in this $70 to $75 range, it should work well, and looks to be a great choice into earnings. Also note, ratio spreads like these are often hedging large equity positions, because you get more "bang for your buck" with this type of hedge into a stock-moving catalyst.
