Christmas comes late for Costco bears
David Russell | [email protected]
optionMONSTER's Depth Charge tracking program detected the purchase of about 1,500 April 100 puts on the warehouse retailer for about $3.25. Blocks of a similar size were sold in the April 95 puts for $1.63 and the April 93s for $1.25. Volume exceeded open interest in all three, indicating that a new position was initiated.
Known as a bearish "Christmas tree," the trade cost $0.37 and will earn a maximum profit of 1,251 percent if COST falls to between $95 and $93 on expiration. Gains will erode below $93, turning to losses under $88 because of the greater number of puts sold short.
COST rose 0.05 percent to $101.23 yesterday. The stock has spent the last three months hovering around all-time highs near $100, which be leading some investors to think that it's susceptible to a pullback.
The trader likely owns COST shares and is using the puts to hedge against a drop. As a long-term investor in the name, he or she is probably willing to be assigned more shares if they go below $93. The Christmas tree hedges their existing position against a drop to that level, while simultaneously programming a buy order if it occurs. If the stock continues to rally, they'd only lose the $0.37 debit.
Total option volume in the stock was twice the daily average, with puts accounting for three-quarters of the total.