Costco is showing impressive relative strength recently and found support at its 50-day moving average after its earnings report. Today, we'll look at an unbalanced iron condor, with a slightly bullish bias for Costco stock.
According to the IBD Stock Checkup, Costco stock ranks No. 1 in its industry group and has a Composite Rating of 92, an EPS Rating of 95 and a Relative Strength Rating of 85.
Shifting Bullish On Costco Stock
As a reminder, an iron condor is a combination of a bull put spread and a bear call spread. You can shift it from neutral to slightly bullish by trading more of the bull put spreads than the bear call spreads. Here's how it works using Costco stock as an example.
First, we take the bull put spreads. Using the Oct. 20 expiration date, we could sell two put spreads, with the 540 strike for the short put and 535 for the long put. That spread is selling for around 55 cents per share this morning. Selling two contracts for Costco stock generates $110 in premium as a credit.
Then the bear call spread. Using a 600 short call and buying a 605 call came to about 50 cents this morning.
In total, this unbalanced iron condor on Costco stock generates around $1.60 a share or $160 of premium for a block of 100 shares.
Trading two put spreads for every one call spread gives the trade a slight bullish bias, but also more risk on the downside.
Profits And Losses
The profit zone ranges between 538.40 and 601.40. This can be calculated by taking the short strikes and adding or subtracting the premium received.
The maximum risk is $840 on the put side and $340 on the call side.
If we take the premium ($160) divided by the maximum risk ($840), this iron condor trade has the potential to return 19%.
A stop loss in this case might be calculated based on 25% of capital at risk, so a loss of around $200.
Costco stock has already reported earnings, 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 Twitter/X at @OptiontradinIQ
