This COST Calendar Put Spread Can Net 363%
Bearish play with a target stock price of $690
Strategy has +363% upside potential and 17% undervalued
|Strategy: Long COST Calendar Put Spread
|Sell 08-Mar-24 690 Put
|Buy 22-Mar-24 690 Put
Option Profit Calculator Results for COST Calendar Spread at 08-Mar-24 Expiration
In this scenario, the optimal stock price for the option strategy would be $690.00 on the date of the first expiration, March 8, 2024. This is equal to the strike price of the options in the spread. Since there is notable downward pressure in both the market and COST, and the strikes are below the current stock price of $717.29, the spread is taking advantage of the market's bearish bias. If the stock price is $690.00 at expiration, we can benefit from the 08-Mar-24 put, which we sold, expiring worthless, and the option that we are long, the 22-Mar-24 put, will still have time premium built in.
Since we do now know what the exact implied volatility will be on March 8, we can use our historical data to make an educated estimate to help us calculate the value of the 22-Mar-24 option. Applying the median historical implied volatility of 23.7 from similar options, the theoretical value of the put is 12.28 at the date of the 08-Mar-24 expiration. Using the above assumptions gives us a potential upside of +363% for this calendar spread.
COST Calendar Spread Value vs. Market Price
According to Market Chameleon estimated value, COST Calendar Spread is trading at a 17% discount to historical benchmark.
If we use historical data to measure how similar spreads in COST were priced in the market, the 4-year average price was 3.18, with a high mark of 4.25 and a low of 1.81.
Currently, the calendar put spread is bid at 1.85 and offered at 2.65. The midpoint of the spread is 2.25.
If we use 3.18 as our historical fair value benchmark, the current market ask price is at a 17% discount, while the current market midpoint represents a 29% discount.
|Historical Values of Similar Spreads
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