This Trade Has Serious Potential

Overview (Earnings Failure Options Trade on COST)

The presenter proposes/holds an “earnings failure” trade on Costco (COST) after its latest earnings release. The goal is to profit from a fast post-earnings directional unraveling, where the market’s initially favorable/contained reaction fails to sustain and price moves in the intended direction.

Catalyst Timing

• Earnings reported: ~4:15 p.m. ET (yesterday)
• Earnings call: ~5:00 p.m. ET
• Immediate reaction: described as choppy/whipsaw (mixed information absorbed quickly)
• Overnight bias: stock traded lower during the overnight session, even though earnings appeared to “beat estimates” on the surface

Trade Setup Logic

Fundamental / Consensus Interpretation

• Even though reported numbers beat estimates, the presenter believes the forward outlook / analyst reaction is bearish.
• They cite analyst target downgrades across the board as evidence that guidance/earnings quality is not truly strong.
• A “beat” contribution is mentioned as being related to tariffs (described as “a t to a tariff fund”).

Price Action Confirmations

• Bottom tick: occurred at the open
• Stock is green on the day (~+2.3%) at the time referenced
• Technical observations:
  • An engulfing candle on the daily chart after the S&P made new cash-session lows around ~9:56 a.m.
  • Stop-outs may occur due to price undercutting previous lows (including new year lows)
  • The stock shows exhaustion in selling and is bouncing from the lower end of a ~2-year range
    • Reference: “August 2024” and that COST hasn’t done much in ~2 years
• Market context: the S&P 500 moved higher early, then reversed to new lows; COST’s relative strength is used as supporting evidence.

Options Strategy (Back Spread)

Instrument and Structure

• Instrument: COST options (calls)
• Structure: Back spread
  • Sell one call strike
  • Buy a higher strike call

Expiration

• November expiration

Strikes Sold / Bought

• Sell: 910 calls
• Buy: 945 calls

Expected Behavior / Payoff Zone

• Current spot referenced: ~918 (also described as in a “19 range” due to chart zoom/scale)
• Worst-case framing (P/L shape explanation):
  • If the stock rallies and “chills out” near ~950, that’s described as the worst case area for this back spread payoff.

Risk and Profit Expectations (Explicit Numbers)

If the Stock Moves Sharply Lower

• Worst case at expiration: ~$1,000 mentioned as worst case (described as “basically come expiration” in the presenter’s model)

If the Stock Rallies and Holds (Not the Intended Case)

• Example scenario: ~930 on Nov 1 (about $12 above current)
• Loss could be: ~-$3,800

Trade Management / Exit Discipline

• The presenter emphasizes earnings failure trades should work quickly.
• If momentum fails or price breaks the thesis level, they plan to exit rather than “let it marinate.”
• Example of an underlying-based exit (illustrative):
  • A close around ~896 would get them out if holding shares
  • Framed as roughly ~2% downside risk from the entry (plus slippage)

Current Performance

• At narration time, the position is reported up ~ $179.

Methodology / Step-by-Step Framework

1. Choose an earnings failure candidate
   • Earnings outside the “hot season,” but with a specific remaining name (COST).
2. Wait for analyst reaction to reveal the “true” narrative
   • Look for analyst target downgrades / bearish interpretation of guidance, not just headline EPS/beat.
3. Confirm with price action
   • Prefer setups where price shows continued downside pressure into the open, then potential reversal/exhaustion, rather than a straight immediate rally while analysts turn bearish.
4. Set tight risk parameters
   • Example invalidation: close ~896 (framed as ~2% loss framework if trading shares).
5. Use options to target fast mean reversion / crowding unwind
   • Back spread selected due to expected payoff/volatility behavior.
6. Exit quickly if momentum is missing
   • Cut if price stops moving as expected soon, even if a formal stop hasn’t triggered.

Volatility / Options Rationale

• Volatility smile: described as “pretty flat” on COST
  • The presenter argues this helps back spreads
• Why flat smile matters:
  • Back spreads can be damaged when retail inflates out-of-the-money call prices
  • Presenter claims that isn’t happening here because the smile is flat
• Implied volatility (IV):
  • Presenter states IV is dropping after earnings (options become cheaper)
  • Viewed as favorable for the structure

Supporting Examples Cited

• Nike
  • Earnings failure trade that they exited after the first week because the trade “fizzled out” and price momentum reversed lower.
• HPE
  • Currently in an earnings failure
  • Described as becoming profitable within the first few days, with payoff continuing after consolidation.

Explicit Recommendations / Cautions

• The presenter cautions the strategy:
  • Is not about being right more than wrong
  • Will often be wrong more often
  • But relies on tight risk control and quick exits
• Earnings failure trades must work quickly
  • If price drifts without momentum, exit even if the thesis isn’t formally invalidated.

Disclosures / Disclaimers

• No explicit “not financial advice” disclaimer is indicated in the provided subtitles.

Tickers / Assets / Indices Mentioned

• COST (Costco)
• S&P 500 (referenced as “S&P” / cash session)
• Examples: Nike, HPE (Hewlett Packard Enterprise)

Presenters / Sources

• No other presenters or third-party sources are named; this appears to be a single channel presenter speaking directly.