Much has been written about how the retail sector had been decimated by Amazon.com, Inc. (NASDAQ:AMZN), but there are a few exceptions and Costco Wholesale Corporation (NASDAQ:COST) is one of them. Costco stock is within 3% of its all-time high whereas Macy’s Inc (NYSE:M) is down about 60% from its heyday.
Fundamentally among retailers, COST is as solid as they come. They have so far been somewhat immune to the AMZN effect, and I think it’s the experience of the trip. For many of its customers, it’s a destination, perhaps mostly for the loss-leaders … where the food and gas is so cheap that they alone justify spending the yearly membership fees.
The free snacks inside don’t hurt either.
Costco’s price-to-earnings is not cheap relative to its peers, but that is a deserved premium, since most of the rest are dying on the vine. Analyst expectations are somewhat optimistic, so there could be room for a downgrade or two but so far COST hasn’t given them a reason to do so.
Click to Enlarge Technically Costco has a potential bullish pattern forming that could place it in contention for setting a new high soon. COST stock is setting higher lows, bumping against the $172-per-share level, and if that’s broken, bulls could retest the recent highs. Although this is not a forecast, it’s encouraging for those on board long the stock already.
What if I don’t already own the stock? Is it too late to join? I personally am not a fan of chasing price targets, especially near all-time highs. That’s why I use the options markets, where I can structure trades that leave room for error. Recently I shared a Costco iron condor that delivered over 30% on risk and with no out of pocket expense.
I am not about to risk $172 per share where my money is at risk with zero buffer. But I can allocate risk below proven support levels with room to spare.
COST Stock Trade Idea
The Trade: Sell the COST Jan 2018 $140 put and collect about $2 per contract. This trade has a 90% theoretical chance of success, where COST stays above my sold put. Else, I am committed to buying the shares for $140 even if they fall lower. Anything below $138 would accrue losses for me. A more conservative version of this would be to sell the $140/$135 credit put spread instead for 70 cents and still yield 8% on risk.
Usually I like to balance my risk by selling an opposing bearish call, but in this case I will delay doing so since markets are in rally mode. Besides, with an 18% price buffer and the amount of time on the clock until expiration I am confident I can manage my risk against the short term price action.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
