Wednesday, January 4, 2012

Trying to saving some money with a Costco iron condor

In CCI's continuing attempt to generate income via options, an iron condor in Costco (COST) was established.

Readers relatively new to option strategies might recall that  an Iron Condor will make money if the stock trades in a range. In general an iron condor is the combination of a put and call spread.  The specific transactions in this case are:
Sell Feb  $ 80.00   Put     Sell Feb $87.50 Call
Buy Feb  $ 77.50  Put      Buy Feb $90.00 Call
Costco is trading around $84.50.  The options were sold for a credit of $79/contract after commissions.
The $80 level is about the 200dma support level, and the $87.5 is near the recent high resistance. This trade is basically a bet that the stock stays within that 10% range.  

The trade is not anticipated to be held to expiration date, but If held to expiration:
  • Worse case the stock hits new highs over $87.50% or pulls back below $80 and the portfolio will lose $171 per contract.  ($2.50spread -.79 credit)
  • Best case the stock stays anywhere between $80 and $87.5, and the portfolio keeps the $79 premium. gains $164. That range is a little tighter than CCI would normally like to see in an iron condor, but I think this stock has become a leading provider of "staples" that is more likely to stay stable than most of the market.
  • Realistic Case - Around Feb. 1 CCI would anticipate looking to exit this trade.  This is after the Jan options expire and are rolled towards Feb, and initial q4 earnings will have been released. 
If all that "option speak" is too much for you,  just think of it as a "bet" that Costco stays between $80 and $87.5 with 1:2 odds.   You can take either side of the position.  However, CCI is looking to hold some positions that make money if the market continues to go sideways.  This is situation where we believe that can happen.

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