Options Trading News

January 10, 2013  Thu 3:47 AM CT

The holidays have passed, but Costco bears seem to think that Christmas has just begun.

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.
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