If you like to shop on the cheap, you may want to wait on Costco Wholesale Corporation (NASDAQ:COST). But with no ‘price guarantees’ COST stock is going on sale again, a cost-cutting and protective modified bullish spread looks like the right merchandise to buy in front of earnings. Let me explain.
As I’ve said before, most of us enjoy a good bargain. And as I wrote nearly two months ago, Costco stock offered some nice value off and on the price chart following its previous earnings topper, which got displaced by oodles of investor anxiety.
That’s not the case today, though that’s not to say shares are bound to get cheaper anytime soon. Bottom line, in front of Thursday night’s first-quarter report, COST is trading just off its all-time-highs after rallying over the past several weeks. This rally left behind overdone worries of the elephant in the room known as Amazon.com, Inc. (NASDAQ:AMZN).
Could an earnings miss, disappointing guidance or simple profit-taking take COST lower? Of course. The price chart supports the idea that a deal on Costco stock could be forthcoming. However, with “price guarantees” anything but certain, I’m inclined to believe it’s the season for bulls to get a bit more jolly in Costco stock.
COST Stock Weekly Chart
Click to Enlarge
Our view was that shares were positioned to improve upon a modest uptrend, which was developing within a larger up-channel shown on the provided weekly chart.
A quick look reveals investor doubt has subsided handily with shares ralling about 20% for the period.
Technically, the reversal in sentiment has also put COST outside the upper Bollinger Band while challenging the upper channel line for resistance. That, of course, could be a point of concern for bulls, but personally, I’m not bearish.
Considering the amount of corrective work within the larger bullish price channel COST stock has endured, I’d be inclined to be a buyer on weakness. At the same time, I wouldn’t be surprised if a more bullish change of character occurs with earnings acting as the trigger.
COST Stock Modified Bullish Butterfly
Last time I detailed a bullish limited-risk modified fence for even money in COST stock. It went on to capture its max profit potential of $5 as the call vertical went fully in-the-money prior to the combination’s November expiration.
Reviewing the board today and given our bullish stance, one preferred strategy is the Jan $193/$200/$203 call butterfly. With Costco shares at $188.86, the modified spread is priced for $1.60 or less than 1% of the risk associated with holding long stock.
As the two embedded verticals are varying widths and the bull call spread wider than the bear vertical, there’s no threat of COST overshooting to the upside and leaving the trader with a loss.
Below $193 and the debit is lost at expiration. But if shares head lower, and you’re serious about buying stock at a discount to today’s price, the $1.60 premium may be a very small fee to pay.
More optimistically, at $200 the spread would be worth $7 and offer a profit of $5.40. This is the result of the bull call vertical maxing out, while the bear vertical goes out worthless. And lastly, above $203, in the less likely event COST stock buyers continue shopping; the trader still walks away with $2.40 in profit.
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!
