Costco Wholesale Corporation, COST, earnings, option, swing, short-term
Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
Preface
Costco Wholesale Corporation (NASDAQ:COST) is one of the few retailers that, for now, appears to be "Amazon proof." A business well entrenched in bulk purchases that may not be easily e-commerced away.
Whether that analysis holds any veracity is debatable, but what we see objectively, and empirically, is that there is a pattern of bullish momentum just days before earnings, and we can track that by looking at swing returns in the option market.
According to our data provider, Wall Street Horizon, Costco's next earnings date is 12-14-2017 after the market closes. 3-trading days before that would be 12-11-2017, so about 2-weeks from the date of this publication.
IDEA
The idea is quite simple -- trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken. Now we can see it in Costco Wholesale Corporation.
The Short-term Option Swing Trade Ahead of Earnings in Costco Wholesale Corporation
We will examine the outcome of going long a weekly at the money call option in Costco Wholesale Corporation just three calendar days before earnings and selling the call on the day of the actual news. Since Costco reports after the market closes, this back-test does not take earnings risk.
This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.
Often times we look at option set-ups that are longer-term, and take no directional bet -- this is not one of those times. This is a no holds barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk.
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 50% stop loss and a 50% limit gain. Here is that setting:
In English, at the close of each trading day we check to see if the long option is either up or down 50% relative to the open price. If it was, the trade was closed.
DISCOVERY
We found COST and this repeating pattern by using the Trade Machine® Pro scanner, looking at the NASDAQ 100 and the 3-day pre-earnings long call.
RESULTS
Below we present the back-test stats over the last two-years in Costco Wholesale Corporation:
Tap Here to See the Back-test
The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).
We see a 246% return, testing this over the last 8 earnings dates in Costco Wholesale Corporation. That's a total of just 32 days (4-day holding period for each earnings date, over 8 earnings dates).
This short-term trade hasn't won every time, and it won't, but it has been a winner 7 times and lost once over the last two-years.
Setting Expectations
While this strategy has an overall return of 49.9%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 22.7% over four days.
➡ The average percent return per winning trade was 35.6% over four days.
➡ The percent return for the losing trade was -67.1% over four days. Note that if this trade goes poorly, that is, if the stock does not rise ahead of earnings, this can be a substantial loser.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. To see how to test this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
The Pattern in Costco Stock Before Earnings
Costco Wholesale Corporation (NASDAQ:COST) : Short-term Option Swing Trading Ahead of Earnings
Date Published: 2017-11-27Author: Ophir Gottlieb
Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
Preface
Costco Wholesale Corporation (NASDAQ:COST) is one of the few retailers that, for now, appears to be "Amazon proof." A business well entrenched in bulk purchases that may not be easily e-commerced away.
Whether that analysis holds any veracity is debatable, but what we see objectively, and empirically, is that there is a pattern of bullish momentum just days before earnings, and we can track that by looking at swing returns in the option market.
According to our data provider, Wall Street Horizon, Costco's next earnings date is 12-14-2017 after the market closes. 3-trading days before that would be 12-11-2017, so about 2-weeks from the date of this publication.
IDEA
The idea is quite simple -- trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken. Now we can see it in Costco Wholesale Corporation.
The Short-term Option Swing Trade Ahead of Earnings in Costco Wholesale Corporation
We will examine the outcome of going long a weekly at the money call option in Costco Wholesale Corporation just three calendar days before earnings and selling the call on the day of the actual news. Since Costco reports after the market closes, this back-test does not take earnings risk.
This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.
Often times we look at option set-ups that are longer-term, and take no directional bet -- this is not one of those times. This is a no holds barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk.
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 50% stop loss and a 50% limit gain. Here is that setting:
In English, at the close of each trading day we check to see if the long option is either up or down 50% relative to the open price. If it was, the trade was closed.
DISCOVERY
We found COST and this repeating pattern by using the Trade Machine® Pro scanner, looking at the NASDAQ 100 and the 3-day pre-earnings long call.
RESULTS
Below we present the back-test stats over the last two-years in Costco Wholesale Corporation:
| COST: Long 50 Delta Call | |||
| % Wins: | 87.% | ||
| Wins: 7 | Losses: 1 | ||
| % Return: | 246% | ||
Tap Here to See the Back-test
The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).
We see a 246% return, testing this over the last 8 earnings dates in Costco Wholesale Corporation. That's a total of just 32 days (4-day holding period for each earnings date, over 8 earnings dates).
This short-term trade hasn't won every time, and it won't, but it has been a winner 7 times and lost once over the last two-years.
Setting Expectations
While this strategy has an overall return of 49.9%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 22.7% over four days.
➡ The average percent return per winning trade was 35.6% over four days.
➡ The percent return for the losing trade was -67.1% over four days. Note that if this trade goes poorly, that is, if the stock does not rise ahead of earnings, this can be a substantial loser.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. To see how to test this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.