If you like to shop on the cheap, it’s time to load up on Costco Wholesale Corporation (NASDAQ:COST). But, with no “price guarantees” in Costco stock, the cost-cutting and protective qualities of a modified bullish fence looks better than ever. Let me explain.
Most of us enjoy a good bargain. Following last week’s earnings topper, that’s all the more apparent in Costco stock. In fact, shares are now trading nearly in-line with the broader indices as its long-standing market premium has vanished like the goods off its store shelves.
There is a catch though. It’s the elephant in the room or actually now all around towns throughout the country known as Amazon.com, Inc. (NASDAQ:AMZN). And with its recent acquisition of Whole Foods, without adding to the drama, it’s putting the Wall Street community at unease.
Having said that, on the Costco stock price chart, that same uncertainty is offering investors the opportunity to shop at very attractive technical levels. This can be made all the more attractive by shopping around in COST’s options market.
Costco Stock Weekly Chart
Since last discussing COST, shares went higher, but were then followed by a price cut.
Technically speaking, the modest net loss in Costco stock is in position to improve a modest uptrend of around three months in duration.
The better news on the price chart is if a weekly low in Costco is established, this would confirm more meaningful up-channel support that we’ve eyeballed off the weekly opening print from 2015’s flash crash. With shares of COST stock shaping up as a weekly doji as of Thursday night, a bullish pattern confirmation next week looks all the more compelling.
Of course, unlike the goods purchased at Costco, there are no price guarantees. However, with a liquid options market and the opportunity to design limited- and reduced-risk strategies to guard against price gouging, positioning on price weakness near key technical support in Costco stock looks all the more attractive on and off the chart.
COST Stock Modified Bullish Fence
Courtesy of OptionVue.com
Given the bullish stance and similar to our last analysis, a “cost-cutting” modified bullish fence looks compelling for positioning. With shares a couple percent lower, however, today’s traders do have a more favorable selection of strikes to position with.
One combination setting up nicely is buying the Nov $160/$165 call vertical and selling the Nov $155/$150 put spread for even money with Costco stock at $157.27.
If COST is between $155 and $160 at expiration, the trader breaks even as both component spreads go out worthless. That’s not terribly exciting. But if Costco stock rallies during the life of the position, as a long delta combination, interim profits are certainly possible below the long call.
If shares of Costco fail to hold support and break the July low of $150, at expiration the trader is on the hook for $5. That amounts to roughly 3% of COST stock risk and compares favorably to a loss of nearly 7% if one simply purchased shares.
Even more attractive from a defensive point of view is because the combination is a limited-risk position, if Costco tanks below technical support and the put spread, the modified fence’s outperformance is that much stronger.
Optimistically and if Costco stock reasserts itself and improves upon both the discussed uptrends, a move through $165 can maximize the combination’s profit potential of $5 as the “free” call vertical widens to 5 points for the full profit capture.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
