Costco is a popular stock with option traders and Costco stock is in the middle of a multimonth consolidation.
Today, we are looking at an unbalanced iron condor, with a slightly bullish bias. Traders can do that by trading more put spreads than call spreads.
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread.
First, we take the bull put spreads. Using the Nov. 15 expiry, we could sell two put spreads with the 855-850 strike prices. Traders could sell that spread for around $0.80 per share late Tuesday. Selling two contracts would generate $160.
Then trader can place the bear call spread by selling the 930 call and buying the 935 call. This spread could be sold for around $0.55.
Costco Stock Trade Has Bullish Bias
Trading two put spreads for every one call spread gives the trade a slight bullish bias, but also more risk on the downside.
In total, the iron condor will generate around $2.15, or $215 of premium.
Meanwhile, the profit zone ranges between 852.85 and 932.15. Calculate this by taking the short strikes and adding the premium received to the short put and adding the premium to the short call.
The maximum risk is $785 on the put side and $385 on the call side.
Max Return Of 27% For Costco Trade
If we take the premium ($215) divided by the maximum risk ($785), this iron condor trade has the potential to return 27.4%.
Additionally, traders can set a stop loss based on 25% of capital at risk. That would be a loss of around $200.
According to the IBD Stock Checkup, Costco is ranked No. 2 in its industry group. It has a Composite Rating of 82, an EPS Rating of 86 and a Relative Strength Rating of 82.
Costco has earnings on Dec. 12, so this trade should have no earnings risk.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
