Heavy Put Activity in Costco Wholesale (COST)

While dire weather forecasts may have sent anxious shoppers to Costco COST to stock up on non-perishables, paper goods, and booze, an investor apparently took a bearish stance on the warehouse-style retailer in Wednesday's trading. Specifically, the March 70 put saw more than 26,000 contracts trade versus open interest of 145 contracts. The stock popped up on the list of put/call ratio leaders, as more than 31,000 puts traded across all option series compared to roughly 2,500 calls.

The lion's share of today's option volume on the March 70 put – 19,490 contracts, to be specific – traded in one block around 10:20 a.m. Central Time.  This trade crossed the tape at $1.13 apiece, which was the ask price at the time. Trading on the offer price suggests the puts were opened on the buy side, most likely by traders with a bearish outlook on the stock.  The entire block cost $2.2 million in premium for the investor in question.

By the close, the put was trading 62 cents higher while the stock was down $1.58, closing at $70.85 on the day. This is a larger price move than the option's delta would suggest, offering another clue that these puts were bought to open.

Long options – puts or calls – risk no more than the premium paid. In this case, if COST is above the 70 strike when the options expire, the most the investor can lose is $1.13 per contract (or $2.2 million). Below the breakeven price of $68.87 (the strike less the premium paid), gains are unlimited down to the zero mark.

Costco earnings are expected on or around March 2, before these March options expire. The retailer has surprised to the upside in three of the past four quarters but it looks as though this bearish investor hopes to see some downside between now and expiration on March 18.

Photo Credit: marbla123

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