Yesterday's Barchart article on Costco Wholesale Corp. (COST) showed that COST stock is cheap. Today's article illustrates an interesting strategy: short one-month out-of-the-money (OTM) COST puts and calls to pay for longer-dated in-the-money (ITM) COST calls.

COST is at $870.32 in morning trading on Dec. 29. I described in the Dec. 28 Barchart article that COST could be worth over 18% more at $1,031 per share ("Costco Has Tumbled Despite Higher FCF and FCF Margins - Time to Buy COST Stock?).

The issue is that it costs a lot of money to buy 100 shares of COST stock, i.e., $87,255 (100 x $872.55). That is a lot of money to tie up to benefit from any upside in COST stock.

Buying 1-Year ITM Calls

One solution is to buy one-year away call options. The outlay is much lower.

For example, the Jan. 15, 2027, call option expiry period shows that the $850.00 strike price call option trades for $111.03 at the midpoint.

That means it only costs $11,103 to gain exposure to COST for over 1 year (i.e., 100 x $111.03). That allows an investor to gain lower capital gains tax treatment if held for over 1 year. 

Moreover, the intrinsic value (IV) is actually worth $20.30 (i.e., $870.30 - $850.00), so the net “real” cost is just:

   $111.03 - $20.30 = $90.73 (i.e., in-the-money net price)

Note that this provides some downside protection, as it is in-the-money (ITM) by $27.55.

Expected Return (ER). Let's say that COST eventually rises to the target price of $1,031 over the next year. The ER is as follows:

  $1,031 - $850 strike price = $181.00 intrinsic value

  $181 intrinsic value - $111.03 cost = $69.97, or $6,997

That represents an expected return (ER) of 63% over the next year:

  $6,997 / $11,103 -1 = 0.63 = +63% expected return

That is much higher than a buy-and-hold ER of 18% in COST stock.

However, now that the investor has exposure to 100 shares of COST stock, it's possible to reduce the cost.

Shorting OTM Calls

Another way to reduce the investment, now that the investor has exposure to 100 shares, is to sell short out-of-the-money (OTM) calls in one-month periods.

For example, the Jan. 30, 2026, expiry period shows that the $915.00 strike price call, which is almost 5% higher than today's price, has a midpoint premium of $6.38.

That represents immediate yield income of 0.73% ($6.38/$870.30) for one month.

Moreover, if an investor can keep this up for the next 12 months, the expected income is $76.56 (i.e., 6.38 x 12), or $7,656.

That covers a large portion of the $11,103 outlay for the in-the-money (ITM) 100 calls expiring Jan. 15, 2027. In other words, it reduces the overall risk of holding the long-dated ITM calls.

Another way to reduce the outlay cost further is to sell short out-of-the-money (OTM) put options in one-month periods.

Shorting OTM Puts

Just like the OTM call short play, this short-put play is for strike prices that are a good distance away from the trading price. In this case, the OTM put strike price is lower (not higher) than the spot price.

For example, the Jan. 30, 2026, $830.00 strike price put has a midpoint premium of $5.28. That strike price is almost 5% below today's price. It also represents an immediate income of 0.636% (i.e., $5.28/$830) for one month.

If this can be repeated for 12 months, the investor could potentially (no guarantee) earn $6,336 (i.e., $5.28 x 100 x 12).

In other words, between the OTM short put and call income, the potential yield is $13,992 ($7,656 + $6,336). That would more than cover the $11,103 outlay cost of the ITM call.

However, there are some risks and issues worth considering.

Risks and Issues to Consider

For example, if COST falls below the $830 put strike price, the investor will have to purchase 100 shares at $830, or $83,000. That is why most brokerage firms require $83,000 in an outlay as collateral.

This could also mean the investor has an unrealized capital loss. The investor has then shelled out $83K, plus the $11K for the ITM long-dated call option, or $94k total. 

That is more than the buy-and-hold strategy cost of $87K at today's trading price. 

Nevertheless, all is not lost. The investor can continue to sell monthly OTM puts and calls to help defray this whole cost. That might reduce any potential unrealized capital loss.

Moreover, at any point, COST stock could rise over the OTM call strike price. In that case, the investor may have to “Buy to Close” the short call position. That could also result in a realized loss position.

So, these are important risks to consider. That is why choosing the distance of the OTM short strike prices is important. They need to be monitored each month.

Nevertheless, this has the potential to provide an attractive leveraged upside play in COST stock.

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