Tony Zhang reviews a 'broken wing put butterfly' options trade to position bearishly on Costco.
Costco has had a spectacular run of exponential growth as a retailer over the past 15 years, but has it finally gotten a bit too far ahead of itself? We'll review a "broken wing put butterfly" options trade to position bearishly on Costco. With a business model focused on memberships and rock-bottom prices, Costco has grown much faster than its peers and commands a significantly higher valuation.
recently printed a new all-time high earlier this week and this was coupled with negative divergence and underperformance relative to the S & P 500. These are signs that the rally is starting to show signs of exhaustion and is losing momentum. The risk of a pullback from here is higher as a result and target $735 in the short run with $700 as an extended target. If we dive into the business, this is where the fundamentals have stretched quite far from reality.
based on the timing of the charts. Additionally, with such a high-priced stock and options premiums elevated with earnings on deck in two weeks, we have to get creative to structure a trade to seek bearish exposure heading into earnings. I'm looking out to the June 7 th weekly expiration and buying a $700/730/775 broken wing put butterfly for $9.72 debit. This entails: Buying 1 Contract of the June 7 th $700 Puts @ $1.83 Selling 2 Contracts of the June 7 th $730 Puts @ $4.
declines below $730 at expiration, there will be lower profit potential that is capped at $528 per contract if
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