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Costco earnings preview and ways to trade.
3 min read

Costco earnings preview and ways to trade.

Costco earnings preview and ways to trade.

  • Costco (COST) reports earnings after the close (~4:15pm)
  • Options are pricing in a 3.5% (about $12) move by tomorrow's close.
  • Prior four earnings (in reverse chronological order) saw much smaller actual moves of -0.4%, -1.4%, -1.8% and +0.9%.

The Setup

Here's a 1 month expected move chart with this Friday's move highlighted, via Options AI technology:

COST stock has basically gone sideways the past month with a failed breakout in early September, just before the broader market sell-off began with its lows and highs matching up fairly closely to the expected move for the event.

Ways to Trade

Neutral - Because the expected move matches so closely with the stock's recent range, and the fact it may be influenced by broader market volatility (VIX above 28)  the first thing to look at is some neutral positioning, analyzing the risk reward of trades that look for it to stay within that expected move:

The +330/-332.5/-355/+357.5 Iron Condor, expiring tomorrow offers a nearly 1 to 1 risk reward with breakevens. Here's a closer look at the trade and its payout chart versus the expected move:

This trade is binary with only a day left til expiry, it likely makes max gain or max loss (max loss on a big move higher or lower). But the fact that it is risking just slightly more to make its max gain makes is the type of set-up you would look for if "selling the move".

Bearish - Looking out a bit farther to be less binary, the October monthly expiration shows a choice between a put spread and a credit call spread.

The choice between these two structures, particularly the credit call spread would depend on views of the overall market volatility. If the market sell-off were to continue and Costco fell even lower, both trades would work, but the credit call spread has the added advantage of being short vol at these higher levels in case the sell-off ended. Of course that could coincide with a move higher so that breakeven to the upside needs to be kept in mind.

Bullish - Thoughts on volatility should also come into play for any bullish structures. Again, looking out to October monthlies:

On a move higher, and if it coincided with a broader market move higher the credit put spread would do really well, whereas the call spread would really need the stock above its breakeven quickly or else falling IV would adversely affect potential gains.


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