Could This Iron Condor Trade In Costco Snatch A 30% Return?

Costco Wholesale (COST) is showing elevated implied volatility (IV) with an IV Percentile reading of 97%. That means that the stock’s current level of implied volatility exceeds most other readings in the past 12 months.


So, options traders may want to consider an iron condor as a strategy best placed when implied volatility is high.

As a reminder, an iron condor setup is a combination of a bull put spread and a bear call spread. When volatility is high, You can place the iron condor further out of the money. This gives the trade a higher chance at success. The idea with the trade? Profit from time decay while expecting that the stock will not move too much in either direction.

Let’s look at an example using COST stock.

How To Form The Iron Condor In Costco Stock

First, we take the bull put spread. Using the Dec. 17-expiring strike, we could sell the 520 put option and buy the 515 put. That spread could be sold on Monday for around 50 cents per share. Then set up the bear call spread. Place it by selling the 595 call and buying the 600 call. This spread on Monday could have generated around 60 cents a stock per pair of contracts.

In total, the iron condor will generate around $1.15 per contract in Costco stock, or $115 of premium for a block of 100 stocks.

The profit zone ranges between a price of 518.85 and 596.15. This can be calculated by taking the short strikes and adding or subtracting the premium received.

As both spreads are $5 wide, the maximum risk in the trade is 5 — 1.15 x 100 = $385. Therefore, if we take the premium ($115) divided by the maximum risk ($385), this iron condor trade has the potential to return 29.87%.

If price action stabilizes, then iron condors will work well.

Managing Risk

One way to set a stop loss for this trade in Costco stock hinges on the premium received. In this case, we received $115, so we could set a stop loss at 1.5 times the premium or a loss of around $175.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around 535 on the downside and 580 on the upside.

COST ranks No. 1 in the Retail-Major Discount Chains group and has a Composite Rating of 97, an EPS Rating of 84 and a Relative Strength Rating of 94.

Earnings for the October-ended fiscal third quarter are set for Dec. 9. So, this Costco stock trade would harbor earnings risk if held to expiry. Also, please remember that options are risky, and investors can lose 100% of their investment.

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 at @OptiontradinIQ.


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