With the latest rally extending up almost to new all time highs, we are left with a market that is pricing in perfection.
The latest move higher over the last few weeks has left many stocks that we look at in overbought territory. As a result, I am shifting my focus to more of a bearish outlook looking for a pullback.
For this week’s Options Trade Of The Week we are going to look at buying a put spread on Costco (Symbol: COST).
PUT Spread – Costco
We have been using a number of credit spreads in recent videos but I want to change it up to show the flexibility that options give us. We are going to look at using the 11 Oct 19 weekly options that have 28 days left to expiration.
We will be buying the 292.5/285 put spread for $3.05 or $305 per spread.
To do this we will be buying a put spread.
- We will be using the October 11 weekly options that have 28 days left to expiration.
- We will be buying the 292.5/285 put spread
- This means we are buying the 292.5 put and selling the 285 put at the same time.
- We are paying $305 per spread which is our max risk on the trade
- Our max profit potential is $445 per spread
The ideal scenario on this trade is for COST to selloff as quickly as possible. Any move down to or below 285 will allow us to make money on the spread.
What About A Debit Spread?
If all we did was buy the 292.5 put it would cost over $800 per contract. Granted it would give us a bigger profit potential but at $800 it’s too expensive for the smaller retail trader.
The put spread that we are buying reduces the cost all the way down to $305 per spread so it’s much less capital at risk.
The cost reduction is great with the spread but it does reduce our profit potential as well.
That is the trade off.
It’s still a trade that I really like on the downside over the next few weeks as COST is very overdue for a selloff.
For a complete break down of our Trade Of The Week as well as a look at our open trades from the last few weeks make sure you review the video below.
You will learn the details of how we are placing trade trade including how we plan on managing it from start to finish.
If you are interested in learning how to find these trades, feel free to contact me directly with any questions you might have. Mike@netpicks.com.