Last time Costco Wholesale Corporation (NASDAQ:COST) stock went on sale we bought it in bulk. The trade paid quickly as COST stock rallied back from a severe correction.
Costco is a premier retailer that had escaped the carnage that Amazon.com, Inc (NASDAQ:AMZN) has inflicted on the entire retail sector especially the brick-and-mortar retailers like Macy’s Inc (NYSE:M).
Since the U.S. elections of 2016, COST stock rose 30%, but that all ended in June of this year. When once again headlines from Amazon taking to the streets by buying Whole Foods Market, Inc. (NASDAQ:WFM) slashed all retail stock prices severely.
On the news, Costco fell almost 20% before finally finding a double bottom in August. It stabilized and mounted a strong bounce to recover half of the losses. Once it crossed $158 per share, $165 became the target of a measured move.
But from here, it may not be as easy to get to $172 per share. This zone has been a level of contention since November 2015, so it is likely to become resistive. Both bulls and bears usually fight hard over long-term pivot points.
Today, I want to essentially rinse and repeat with another bullish trade knowing I have profits in hand. The benefit of having survived a strong selloff like the one COST just saw is that it creates solid support levels. I want to leverage those lines of defense to create income with no money out-of-pocket.
I like the company from a client and investor perspective. It trades at a trailing 28 price-to-earnings ratio, which is not a screaming bargain, but it’s not bloated either. The experts on Wall Street agree. Most of the analysts that cover it rate Costco stock either a BUY or HOLD, so they’re not overzealous.
However, almost all of them have price targets above where it’s trading now. COST is now trading almost $15 per share below the average price target; therefore, it is trading at the bottom end of the range on Wall Street.
I am not one to buy hopium but when I see value I’m willing to bet bullish on this value. And that’s the case today. I see value in Costco stock and I’m willing to bet that the recent floor will hold through 2017 and perhaps beyond.
COST stock is a winner regardless of the AMZN threat. I am willing to bet that it will rise to the occasion of succeeding in the long run.
Bottom Line on COST Stock
I won’t be buying the stock outright and risking $164 per share and pray for a rally in order to profit. Instead, I will sell downside risk against a value that I perceive and the stock. If the price stays above my risk, then I retain maximum gains.
The trade: Sell COST Jan 2018 $145 naked put and collect $1.60 per contract to open. Here, I have an 85% theoretical chance of success. But if the price falls below my strike, I accrue losses below $143.40.
Selling naked puts on a three-digit stock price requires margin. To lessen the dollars at risk, I can sell a spread instead.
The alternate trade: Sell COST Jan 2018 $145/$143 bull put spread, where I have about the same chance of success and yield 10% on risk.
It is important to note that in either set up, I don’t need a rally to win. Costco stock can fall and I can still achieve maximum profit.
Investing is risky so I never bet more than I can afford to lose.
Learn how to generate income from options 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 as @racernic on twitter and stocktwits.
