2 Pre-Earnings Trades on Costco Stock

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While earnings season is unofficially “over,: there are several companies on the earnings docket still worth watching out for. One of those, Costco Wholesale Corporation (COST), is slated to release its first-quarter earnings report ahead of the open this Wednesday. Costco already has some momentum behind it, reporting better-than-expected November same-store sales last week.

Costco Wholesale Corporation COST stockBut can Costco stock, which is trading at all-time highs, continue to gain ground?

COST is expected to report a quarterly profit of $1.09 per share — a nearly 14% increase over the same quarter last year. Meanwhile, revenue is seen advancing 7% year-over-year to $26.28 billion. Revenue, however, is pretty much a foregone conclusion, with Costco reporting preliminary sales data last week.

Driven by the company’s strong performance, and Costco stock’s impressive price action, analysts appear to have set their sights pretty high heading into this week’s quarterly report. In fact, EarningsWhisper.com reports that the first-quarter whisper number for Costco rests at $1.11 per share — just above the consensus estimate.

What’s more, data from Thomson/First Call reveals a wealth of bullish sentiment, with 20 of the 28 analysts following Costco stock rating it a “buy” or better, versus seven “holds” and just one “sell” rating. There is still room for improvement, however, with the 12-month consensus price target of $142 representing a discount to Friday’s close at $143.25.

Turning to the options pits, short-term traders are sending mixed signals on COST stock. For instance, the weekly Dec. 12 put/call open interest ratio arrives at a middling 0.87, while the December/January 2015 put/call open interest ratio nearly doubles to a perch of 1.64. In other words, options traders appear to be speculating on an earnings rally, but an eventual selloff, likely due to profit taking.

costco stock chart
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Overall, weekly Dec. 12 implieds are pricing in a potential post-earnings move of about 2.3% for COST stock. This places the upper bound near $146.33, while the lower bound lies at $139.67. A rally would send COST further into all-time high territory, while a decline would send the stock down for a test of support at its 20-day moving average.

2 Options Trades for Costco Stock

Bear Put Spreads: With Costco stock trading in overbought territory and investors already tipped off to a strong quarterly report, COST is in danger of a sell-the-news event. This doesn’t mean that COST’s long-term uptrend is in danger, but some short-term profit taking could certainly be in the mix. As such, short-term options traders may want to consider a Jan 2015 $140/$143 bear put spread. At last check, this spread was offered at $1.29, or $129 per pair of contracts. Breakeven lies at $141.71, while a maximum profit of $1.71, or $171 per pair of contracts, is possible if COST closes at or below $140 when January options expire.

Bull Call Spreads: Alternately, if you are willing to take a risk and bet that Costco stock can continue its run despite short-term pricing pressures, a Jan $143/$145 bull call spread has some serious potential. This spread was offered at 60 cents at the close of trading on Friday. Breakeven lies at $143.60, while a maximum profit of $1.40, or $140 per pair of contracts, is possible if COST closes at or above $145 when January options expire. Traders should also note that a double on this trade can be had (at $144.20) even if COST fails to top the $146 mark, so set your limit orders.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/costco-stock-cost-wholesale-corporation-earnings/.

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