Why the Crowd Keeps Losing — and This Wins (HINT: Start trading overlooked names)
Hey everybody, JD here with your Rational Trader Market Analysis daily.
We’re going right back to the well today. The Mean Reversion Cash Machine trade has already delivered a couple of nice wins this week, and we’ve got another setup worth taking. This time, the target is Costco (COST).
Why Costco?
Costco is reporting earnings after the close. The stock has been trading nearly two standard deviations below its mean.
Quick refresher: two standard deviations is a statistical way of saying “this stock has drifted really far from average.” In statistics, when something strays too far from the mean, the odds favor a snapback — not necessarily to the full average, but at least part of the way.
Think of it like a rubber band that gets stretched… it’s got a bunch of energy and it just wants to snap back into its normal position.
When we see that kind of stretch, combined with event-driven option pricing, it sets up beautifully for our defined-risk plays.
This Time, a Call Debit Spread
Instead of selling premium through a credit spread, today we’re flipping to the other side with a call debit spread.
Here’s the setup:
- Buy the $937.50 call
- Sell the $957.50 call
- Expiration: this Friday, September 26
That’s a $20-wide spread, costing about $8. The maximum potential profit is the difference between the two strikes minus what we pay.
In this case, that’s a $20 wide spread (957.50 – 937.50) minus the $8 it costs to enter the trade, giving us $12 of potential profit. Defined risk, defined reward.
What Needs to Happen
Costco doesn’t need to soar for this to work. The stock only has to climb less than 2% for the spread to hit its full profit. In the world of earnings reactions, that’s hardly an ambitious ask.
If earnings come in better than feared, or even just not disastrous, that kind of bounce is very much in play. Remember: the stock is stretched nearly two standard deviations below its mean. The rubber band doesn’t have to snap completely back for us to get paid — just enough to release the tension.
Wrapping It Up
That’s the kind of setup I like: clear logic, defined risk, and odds tilted in our favor.
This is JD, good luck out there, and I’ll be back next week with the next Rational Trader.
Talk soon,
JD
The Rational Trader
P.S. Don’t forget to join me on my FREE Telegram channel for faster access to these videos, trade ideas and more.
