Let's start by saying it's 3:00 p.m. on Thursday and I am going to talk about the big sell off that Costco experienced this morning. There was news on it that seemed to take some time to be disceminated. I tried looking for what the news was all about in the first hour of trading and couldn't find any. As it turned out it was the "regular-stuff" type of news like last month's retail food sales or something like that. Everyone listening to this type of news seem to have their own slant as to what is happening. For many people this news is not that important. Costco often releases news like this. Sometime shareholders get stressed and bail. Why wait around to see if it only gets worse? There are always sharks out there waiting to nibble at falling prices. In the early few minutes of trading this morning the average retail trader had no knowledge as to what this news was all about. Opening markets started to tumble. This sometimes happens. If you're a frequent option trader does an instinct in you kick up and say let's jump away from looking for a rebound? One problem is that if you jump in to early the value of your intial investment could drop in half in only fifteen minutes. It always seems to be best to wait just a little bit longer! Call it the dropping knife sydromdrome. Many traders opt to stay away from these kinds of situations. I understand why. Tens of thousands of traders have followed this stock for a long time. Let's move forward. It's now 3:03 p.m. Let's check in on the action. Costco is way down in price $28.00! That's a big chunk. Might all of it's series of Call options that where bought in the first half of the day now be underwater? Let me show you some of them. A I don't usually find these "looking-for-a-rebound" situations to be very profitable adventures.
The issue of "when-is-best-time-to-get-in" gets even more complicated. One has to wonder as to whether or not a second wave of opening selling pressure will hit the markets on tomorrows opening. That's the worry. Now there is more to the story that option traders might want to hear. Let's go back to what happened this morning. Costco had a great fall. Look at this morning chart.
If you were in that moment doesn't look like at this point in time the stock might reverse it's downward fall? $17.00 dollars was a big drop on no apparent news. Get in, get in quickly. This looks like an oversold situation. Look at how this near the current striking price options are trading. They are moving upwards. It said $3.90 and now $5.75 and probably rising. At this point in time doesn't it look like there is an urgency to get in? Yet here is the thing. Costco probably wasn't even on your radar screen all week. Why are you now such an expert?
Here we now are at 3:38 p.m. and this is now where this same series of Calls are now at. They are down again however look at how they jumped up from $1.37.
Here they are again with five minutes left in the trading session.
Here is how they closed the day.
Would you want to be holding one of these Calls? I am not a big fan of owning "out-of-the-money" one day Calls overnight. Yet in this case the bad news wasn't really all that bad. Friday morning. Costco is up over $8.00 in the first haf hour of trading.
This upward opening move helped all of the traders who got in close on it's Call options to the end of the day. It helped them get a double on their Call option positions. It doesn't always turn out like this. Here also is how the stock ended up trading on the day and a closing look at these options.
So yes there was a way to play yesterday sell off which amounted to waiting until the end of the day (yesterday) to buy in. Today Friday, the storey was reversed. Buying the Puts around ten a.m. this morning as the stock was rebounding was a profitable way to go. Here is one series to examine.
Keep all of this information in mind the next time you see Costco drop like this on a Thursday. It happens more frequently than you might think. Costco option trading can work well at times.
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