Dan Nathan spoke on CNBC's Options Action about unusually high bearish options activity in Costco Wholesale Corporation COST ahead of earnings report.
The company is going to report earnings on Thursday and over the last four quarters it has moved 2.5 percent on average in either direction. The options market is currently implying a 3 percent move. Traders were buying puts on Tuesday and put options volume was three times higher than call options volume.
When Costco was trading at $177, there was a buyer of 4,000 contracts of the March 170 puts for $0.68. The trade expires on Friday and it breaks even at $169.32 or 4.44 percent below the closing price on Tuesday.
Nathan explained that this trade looks like a hedge against a sharp move lower after the earnings report.
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