Ever since Amazon.com, Inc.‘s (NASDAQ:AMZN) entrance into the grocery space, Costco Wholesale Corporation (NASDAQ:COST) shares have been a hot mess. Since peaking in early May, COST stock is down 13%. But, really, the entirety of the damage was dealt during the June swoon. After that, a range was established, and despite some furious rallies and scary dives, the stock is virtually unchanged for the past four months.
And therein lies opportunity … if you’re willing to use options contracts, that is.
The neutrality of Costco’s range is confirmed by the behavior of its major moving averages. Just look at the 200-day, 50-day and 20-day. They’re all flatlining.
While trend traders are justifiably vexed by COST stock’s unwillingness to follow through in one direction or the other, those wielding neutral strategies are finding the stock mighty attractive these days.
Interestingly, a small uptrend was taking root, but Costco’s earnings announcement from two weeks ago put an end to it. With the large price gap, the stock finds itself back in the middle of its range. And that makes right now an opportune time to deploy neutral positions.
Key support looms near $150 and resistance sits at $165 making an Iron Condor with short strikes around both levels seems like a smart bet.
Build a COST Condor for Flight
Sell the Nov $165/$170 bear call and the $150/$145 bull put for $1.10 net credit. This spread positions you to capture the max profit of $1.10 if both spreads expire out-of-the-money. The initial cost (and risk) of the trade is $3.90 and will be forfeited if the stock rises above $170 or falls below $145.
The other variable increasing the appeal of selling iron condors here is the implied volatility rank, which stands at a lofty 53% even though earnings has already passed. A drop in volatility over the next few weeks will accelerate your rate of gain.
As of this writing, Tyler Craig held neutral options positions in COST. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
