by John Kmiecik | October 1, 2012 6:45 am
Winter is approaching whether you like it or not, and if you live in a cold-weather state, it could be much more depressing.
Now is the time to stock up on food and supplies so you’ll have to venture out less when the cold weather strikes. To be able to do that will take money that you might not have budgeted for. Here is a trade idea that might allow you to do both … plus get some free samples.
The trade: Buy the October 100 Costco (NASDAQ:COST) calls for $1.80 or less.
The strategy: A long call is generally considered a bullish option strategy. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is essentially unlimited with a long call because the stock can continue to rise, and the maximum loss is $1.80, or whatever was paid if Costco stock finishes below $100 at October expiration. Breakeven is at $101.80 at expiration based on a cost of $1.80.
The rationale: Most people probably are familiar with Costco. The company operates more than 600 wholesale warehouses around the world, but primarily in the U.S. Many analysts think COST is the cream of the crop when it comes to wholesale retail. The company is profitable and growing. Costco plans to open six additional warehouses in 2012, and the company’s revenue has grown much faster than its P/E ratio in the past several years.
Costco stock has moved from about $82 in May to where it is currently trading. That’s why this trade idea might work. COST found resistance at $100 earlier in September and finally was able to move higher. This past week, Costco stock has drifted back to that area, which should act as support and should be able to bounce the stock higher again.
The company is expected to announce earnings on Oct. 10. Because of that, there might be a rise in implied volatility heading into earnings, which should increase the call’s premium. If this trade idea works, profits should be taken ahead of the announcement — just to be safe.
This one might have to be bought in bulk!
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.
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