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Cost Cutting

We say it often on the show: we like to risk less to possibly make more. That's why we typically shun buying options outright, and choose to pair our costs by selling one option to buy another. But occasionally, one of our guys (and gal) senses a bargain, and that's exactly what happened with Dan's strangle on Costco.

A Costco employee pulls shopping charts at a Costco Wholesale store.
Damian Dovarganes
A Costco employee pulls shopping charts at a Costco Wholesale store.

Thinking that Costco options were underpricing the move into earnings, Dan bought the October 55/57.5 strangle, paying $0.90 for the 55-strike put and $1.10 for the 57.5-strike call, net net shelling out a total of two bucks on the hopes of a big move on earnings.

Now, in order for Dan to make money, he needs Costco stock to close either up or down by more than the cost of the trade, or above $59.50 (57.5-strike call, plus $2.00) or below $53 (55-strike put minus $2.00) by October expiration. With Costco stock above that $59.50, Dan can sell that call for $2.55, and in the process turn a tidy $0.55 cent profit in the process.

  • Costco Profit Beats Street

"There are really no other catalysts between now and October expiration," said Nathan. "So sell that call, make money on the trade, and you effectively own that put for free should the stock trade lower."

Important point to make here: you don't have to hold your trade to expiration. "There is no reason to just sit on options and let them decay with no identifiable catalyst," said Nathan.

Questions, comments send them to us at: optionsaction@cnbc.com

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