Costco Wholesale Corporation (NASDAQ:COST) reported mixed earnings results and COST stock dipped a little on the headline. But that’s on a day where there is so much uncertainty coming from the white house, there is complete confusion as to who is selling what and why. And therein lies my opportunity.
My thesis for 2018 still remains that the fundamentals favor the bull thesis. I don’t expect that we would have as easy a year as last, but I reject the notion that stocks are expensive and that we need a massive correction. Not having had a correction for a while is not reason enough to have one. I haven’t wrecked my car in a while, yet I still drive … cautiously. So I continue to trade healthy stocks on a fundamental basis.
Costco and Walmart Inc (NYSE:WMT) often get caught up in waves of selling and usually due to headlines from Amazon.com, Inc. (NASDAQ:AMZN). But it is my thesis that there is enough room for all three to prosper. They each have enough niche for the foreseeable future. To me, COST is a weekly trip that neither WMT or AMZN could replace. Much like those who enjoy the trip to Starbucks Corporation (NASDAQ:SBUX) won’t switch to a home-brew.
How to Trade COST Stock
Fundamentally and from a price-to-earnings perspective, COST stock is priced inline with WMT; AMZN is in its own stratosphere. So owning COST shares at a discount from here will be an opportunity that is likely to be profitable in the long run, even if my current setup fails.
Early in February, Wall Street decided to elevate CBOE Volatility Index (INDEXCBOE:VIX) levels off of panic over interest rates. This is important to me because it means that my trade will potentially pay more than a few weeks prior just because traders are on edge. Selling downside risk, especially when I do so against proven support, becomes my favorite method of trading.
Technically, COST stock has been swinging around a pivot zone near $177-per-share. Headlines caused a retest of $157, but have since recovered. Currently the bulls are fighting to hold above the pivot, so they can establish it as forward support. For today’s trade, I will bet that the support will continue to hold for the near-term and I will profit from it if it does.
Experts agree, as most COST analysts rate it a buy, yet it still trades near the lowest of their price target and 12% below the average. They expect more upside. While I don’t need that to profit, if it comes I would profit faster.
The Trade: Sell the COST Jun $148 put. This is a bullish trade for which I collect $1 to open. I have a 85% certitude that I will retain maximum gains. But if the price falls below my strike, then I own shares. I would then need to manage off my break-even point of $147.
Selling naked puts is daunting, especially at the elevated levels of the VIX, so those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell COST Jun $158/$155 credit put spread. The spread has the same odds, but would deliver 15% yield on risk. Neither trade requires a rally to profit.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.