Strike a Bargain With Costco Call Options

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The earnings schedule is entering the “darkest before the dawn” period.  That’s the couple of weeks before the new earnings season begins, which in this case is Oct. 11.  But there are a few names of note beforehand, including one of our favorites: Costco (NASDAQ:COST).

Costco reports next Wednesday before the open, with analysts expecting $1.09 a share, a 12.4% increase from the same quarter a year ago.  That’s not out of line with recent quarters — the past four have averaged growth rates of around 14%.

The company has a spotty record of beating earnings reports.  During the past 12 quarters, COST has produced three beats, three meets, and three misses.

Performance of the company’s shares after recent reports has also been mixed, but the pattern has been fairly consistent.  The initial reaction to earnings is negative.  In fact, the past three releases have been followed by declines the next day.  But the shares quickly recovered to go on to higher ground.

The stock is currently trading near its all-time highs around $85.  This level has been difficult for the stock to overcome during the past couple of weeks.  But the 10-day moving average is also in play as support.

The bottom line is that COST is not overly compelling as a strict “earnings play” since beating estimates and post-earnings performance have been iffy at best.  But our relative strength charts tell us that the stock has blown competitors Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) out of the water.  The warehouse discounting space is a good place to be right now, and no one does it better than COST.

To play COST before earnings, go with a longer-term, deeper in-the-money call option that can withstand a post-earnings pullback.  The November 80 call goes for around $6.50.  But the better play may be to wait for earnings to pass before jumping in.  A drop to the 20-day moving average at $82 or even the 50-day average at $79 would make an excellent entry point.  Then play a near-the-money November call.

Have a great trading week.


Article printed from InvestorPlace Media, https://investorplace.com/2011/09/strike-a-bargain-with-costco-call-options/.

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