We’ve come to the end of another week of trading.
The S&P 500 is up 0.42% through the first four days, but the futures point lower, suggesting we could finish the week in negative territory by Friday’s close.
Corporate earnings reports have been weak, which is making things worse. In addition, today is the first “triple witching of 2025,” when stock options, index futures, and index options all expire simultaneously, prompting investors to either roll over their bets or close them out early in trading.
Meanwhile, yesterday’s unusual options activity was reasonably robust, with 1,048, including one for Costco (COST), which brings me to today’s commentary.
I read an article this morning discussing seven options-for-income strategies to consider.
That got me thinking: Why not take one of my favorite stocks and its unusual options activity from yesterday and use it (as best possible) to consider these seven options income strategies?
Because I’ll be discussing all seven, I won’t explain why I like Costco except to say that despite its steep valuation, its return on capital is higher than it has been in the past decade, which indicates that the company is doing a lot of things right in its business.
Have an excellent weekend.
A Covered Call
Given that the unusually active option for Costco was a put, I’ll have to select a call option for the covered call strategy. This strategy involves owning the stock or buying Costco shares and then selling a call out-of-the-money (OTM) or at-the-money (ATM) to generate income.
The downside of this strategy is that you’ll likely have to sell your shares if the share price is in-the-money (ITM) at expiration. So, if you opt for an ATM call, you’ll want the DTE (days to expiration) to be short, but the income will be higher than if you go for an OTM call with a longer DTE.
As I said in the intro, COST stock isn’t cheap, so you’ve got to be bullish about its long-term potential.
Based on yesterday’s closing price of $895.40, your outlay will be $89,540 for 100 shares. If you can generate 5% annualized income, you’re doing alright. That would be $4,477.
I’ve found a call that combines a relatively short DTE and OTM.
With six weeks to expiration and 8.33% out of the money, the OTM probability is 85.73%. Based on the $4.80 bid, your annualized return is 4.55%, slightly below the 5% target but a reasonable risk/reward.
A Married Put
Also known as a protective put, this is where you own Costco shares and buy a put to protect on the downside. While you’re not generating premium income per se, you can generate income by the stock appreciating over the option’s duration.
Let’s see if we can get the March 28 $870 put into this strategy.
You buy 100 shares of Costco at $895.40. You also buy one contract of the put, which expires next Friday, for an ask price of $4.35 or 0.5% of its share price.
Let’s say Costco announces that it’s obtained lower prices from its Chinese suppliers, effectively shifting the burden of tariffs on the manufacturers. That would be excellent news for the stock, which jumps 10% ($89.54) on the news. You sell the shares for a profit of $85.19 [$984.94 - $895.40 - $4.35 ask price].
That’s an annualized return of 433.4% [$85.19 / $895.40 * 365 / 8 days to expiration]. The odds of this happening are slim to none, but it’s certainly within the realm of possibilities.
A Protective Collar
This involves owning the stock and combining the two previous options strategies. In this instance, you don’t believe the share is headed anywhere, but you want to protect your downside.
In this example, you want the call’s strike price OTM and the put ITM. We’ll go with the March 28 $870 put.
If you’re interested in income, you’ll want to choose a call closer to the share price. The net credit of $5.65 has a profit probability of 57.4% and an annualized return of 28.7%. Your maximum downside here is $19.75, or 2.84%.
You can generate an even higher return if the shares are above $1,065, but that would require a 19% move over the next week. In addition, you would have to sell your 100 shares, which is not what you want if you’re bullish in the long term.
A Strangle It Is
In this strategy, you buy a call and put at different strike prices with the same expiration date. You want the call strike to be above the current share price and the put strike below the share price.
The tricky part about this strategy is that the cost of the two options is at risk if the share price isn’t above the call strike or below the put strike.
Using the $870 put expiring in a week, the profit probability ranges from a low of 22.3% to a high of 35.5%, so a loss in this situation is possible.
Assuming a 10% gain in the share price over the next week that was used in the married put example, the $870 put, and a $900 call, your gain would be $70.09 [Share price $984.94 - $900 call strike price - $14.85 net debit], an annualized return of 355.9% [$70.09 / $895.19].
The short strangle assumes the share price would be between the put and call strike prices at expiration. Using the same call and put strike prices, you would generate an annualized return of 59.3% [Net credit $11.65 / share price $893.50 * 365 / 8].
A Straddle Rather Than a Strangle
In the case of the straddle, you buy a call and a put option with the same expiration date. Only in this case is the strike price the same.
So, here are the current prices for the $870 call and put expiring on March 28.
Call
Put
First, the net debit would be $33.70 [Call ask price $29.05 + put ask price $4.65] or 3.7% of its $895.64 share price. Let’s assume in this example that the share price falls by 10% to $806.08 at expiration.
In this case, your profit would be $30.22, an annualized return of 155.1% [$30.22 / $895.64 * 365 / 8]. Like the covered call, the odds of Costco shares falling 10% in the next week are low.
The Long Iron Condor Appears Complex
The long iron condor combines a bear put spread and a bull call spread. In this strategy, you expect volatility to increase.
The long iron condor option strategy involves selling a put option, buying a put option, buying a call option, and selling a call option, all at consecutively higher strike prices.
We get 15 possibilities in this situation using the March 28 $870 put. You would sell this, buy a higher-priced put, buy a higher-priced call, and sell a higher-priced call.
I’ll choose a good combination of profit probability and risk/reward. Two of them meet the objective.
I like the second possibility because I always consider the worst-case scenario, which has a lower maximum loss. Based on the maximum profit of $13.55, it has an annualized return of 68.4% [$13.55 maximum profit / $896.47 share price * 365 / 8].
Not too shabby.
The Long Butterfly Might Be Even Better
In this strategy, you expect increased volatility but are unsure if the stock will move higher or lower.
The long iron butterfly option strategy involves selling a put option, buying a put and a call option and selling a call option, like the long iron condor.
Once again, using the March 28 $870 put strike as the first leg of the four legs, I’m looking for a good combination of profit probability and risk/reward. I’ve got two choices.
You can see that the first example has a $15 difference between the put and call strikes, while the difference for the second is $10. So, even though I’m always concerned about the worst-case scenario, the first example has a lower breakeven on both the upside and downside, hence the 480 basis point difference in profit probability.
That’s it for now.
