IInvestors in Costco Wholesale Corp (Symbol: COST) saw new options available today, expiring on December 10th. At Stock Options Channel, our YieldBoost formula scanned up and down the COST options chain for the new December 10th contracts and identified a put and a call contract of particular interest.
The put contract at the strike price of USD 485.00 has a current bid of USD 10.05. If an investor were to sell this put contract to open, they would agree to buy the stock for $ 485.00 but also collect the premium, setting the cost base of the stock at $ 474.95 (before brokerage commissions). For an investor already interested in buying COST stock, this could be an attractive alternative to paying $ 490.19 / share today.
Also, since the exercise price of $ 485.00 represents a discount of approximately 1% to the current trading price of the stock (in other words, it is out of the money by that percentage), there is also the possibility that the put contract could expire worthless. Current analytical data (including Greeks and implied Greeks) suggests that the probability of this happening is currently 100%. Stock Options Channel tracks these odds over time to see how they change and posts a graph of these numbers on our website under the contract details page for that contract. Should the contract expire worthless, the premium would represent a return of 2.07% on cash or 17.57% annualized – in the Stock Options Channel we call this the YieldBoost.
Below is a graph showing the last twelve months of trading history for Costco Wholesale Corp and marked in green where the $ 485.00 strike is compared to this history:
On the call side of the option chain, the call contract at the strike price of $ 495.00 has a current bid of $ 9.80. If an investor should buy COST stock at the current price level of $ 490.19 / share and then sell that call contract as a “covered call” to open the stock, he or she agrees to sell the stock at $ 495.00 . Considering the call seller also collects the premium, this would result in a total return (excluding dividends, if any) of 2.98% if the stock is called on December 10th (before brokerage commissions). Of course, there could still be a lot of upside potential on the table if COST stock really skyrocketed, which is why it’s important to look at the last twelve months of Costco Wholesale Corp’s trading history and study the fundamentals of the business. Below is a graph showing the last twelve months of COST’s trading history, with the $ 495.00 strike highlighted in red:
Given that the strike price of $ 495.00 represents a premium of approximately 1% on the current trading price of the stock (in other words, it is out of the money by that percentage), there is also the possibility that the covered call -Contract expires worthless, in which case the investor would keep both his shares and the premium received. Current analytical data (including Greeks and implied Greeks) suggests that the probability that this will happen is currently 99%. On our website under the contract detail page for that contract, the Stock Options Channel tracks these odds over time to see how they change and publishes a graph of these numbers (the trading history of the options contract is also recorded). Should the covered call contract expire worthless, the premium would represent an additional 2.00% return for the investor or 16.95% annualized, which we refer to as the YieldBoost.
In the meantime, we calculate the actual volatility of the last twelve months (taking into account the last 252 trading days and today’s price of $ 490.19) at 18%. You can find more interesting ideas for put and call options contracts on StockOptionsChannel.com.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.