Costco (COST) Covered Call Strategy: Generating Income on a Premium Stock

The COST Dilemma

Costco is one of the most consistently loved stocks in the market. The business is exceptional, membership renewals stay above 90%, and same-store sales grow reliably. The problem is the price tag. At $920 per share with a P/E north of 50, you are paying a steep premium for that quality.

This creates a tension for shareholders. You do not want to sell because the business keeps compounding. But the stock occasionally stalls for months, especially after big runs. Covered calls let you get paid during those sideways stretches.

Premium Reality Check

COST has relatively low implied volatility, usually 20-25%. Combined with the high share price, this means dollar premiums are reasonable but percentage yields are modest.

| Timeframe | Strike (Delta) | Premium | Annualized Yield | 30 days$960 (20-delta)$8.50~11% 30 days$950 (25-delta)$11.00~14% 45 days$970 (20-delta)$12.00~10.5% | 45 days | $960 (25-delta) | $15.50 | ~13.5% |

These are not eye-popping yields compared to high-IV names. But for a stock that historically appreciates 15-20% annually, even 10% in additional call premium is meaningful.

The Right Approach for COST

Sell Far OTM After Rallies

COST tends to rally in steps, then consolidate. After a 5-7% run in a few weeks, selling 5-7% OTM calls captures premium during the inevitable pause. The $970-980 range after a push to $920 gives you room to participate in further upside while generating $6-10 per contract.

Use 45-DTE for Better Theta

The 45-day expiration provides significantly more premium than weeklies on COST, and the stock moves slowly enough that you rarely get tested within the first two weeks. This sweet spot maximizes theta decay before the position needs active management.

Roll Up and Out Aggressively

If COST rallies through your strike, do not panic. Roll up $10-20 in strike and out 2-4 weeks. The credit or small debit for rolling is usually worth it because COST rarely sustains vertical moves. It grinds higher over months, giving you time to adjust.

Earnings Considerations

Costco reports monthly sales figures, which reduces the earnings surprise factor. The stock still moves 3-5% on quarterly reports, but the monthly data gives you early signals.

Before earnings: IV rises modestly. Consider selling the next monthly call a week before the report to capture the IV expansion.

After earnings: If the stock gaps up, your call may be in-the-money. Roll it forward. If it gaps down, your existing call loses value quickly, which is exactly what you want.

Special Dividend Wrinkle

Costco occasionally issues special dividends, sometimes $15 per share or more. These are not predictable and can affect option pricing. If a special dividend is announced while you have calls sold, be aware of early assignment risk on in-the-money calls. Monitor the time value versus dividend amount.

Position Sizing

At $920 per share, one contract of COST ties up $92,000 in stock. This is not a position most retail traders can diversify around. If COST is a large portion of your portfolio, consider selling calls on only half your shares, leaving the rest uncovered for full upside participation.

What Makes This Strategy Work

The covered call on COST is not about generating massive income. It is about adding 8-12% annually to a stock that you plan to hold regardless. Over five years, that additional income compounds meaningfully.

OptionsPilot tracks COST's IV percentile and flags when premiums are above average, so you can time your covered call entries for maximum yield rather than selling mechanically every month.