The earnings season is in full swing and equity markets are even more on edge than normal this round. Wall Street is still abuzz with several other major headlines from tariffs wars, geopolitical unrest and fears of rising rates.
When the Feb. 2 correction hit the stock market, Costco Wholesale Corporation (NASDAQ:COST) stock was at all-time highs. But the strength of a company’s stock becomes evident by how it handles adversity. COST stock bounced sharply off its bottom that same week in an emphatic fashion.
It has since bounced and almost completely erased the correction, and we are again looking for Costco to make new highs going into its earnings. Usually I like to wait until after the earnings before I reengage investing in a stock. However, the price action in COST looks healthy enough for me to risk holding long through the event itself.
I am still optimistic on the overall markets in spite of the threats that are circulating n the media ticker tapes. But I still worry about surprise tweets and headlines to surface for the next few months. So instead of risking almost $200 per share to buy the stock outright and leaving no room for error, I will use COST options for a safer bullish bet on a great company.
I am a fan of the stores, and of COST stock. There have been threats from Amazon.com, Inc. (NASDAQ:AMZN) and Walmart Inc (NYSE:WMT). But I believe these three giants will prosper in the future at the expense of other competitors. COST management has been near-flawless and rarely gives Wall Street a specific reason to sell the stock.
Fundamentally, the stock is not dirt cheap in absolute terms at 27 price-to-earnings ratio. But it’s in lime with Walmart and most definitely cheaper then the astronomically priced Amazon. So there is value, given the results COST offers.
Click to Enlarge Technically speaking, Costco stock set a major pivot point above $175 per share back in February of 2017. And for the last six months, there has been support against strong threats to that neckline. And therein lies my thesis for today’s trade. I want to bet that support will hold for COST stock through 2018.
If I’m wrong, I will be more than glad to own the shares at a discount, which would be the worst-case scenario for this trade. I get to keep my premium and own a great stock at a heavy discount from current prices.
There might be challenges but with value on my side and a great management team I am confident that I can manage the risk to a favorable outcome
Costco Stock Trade Ideas
The Trade: Sell the COST Jun $170 naked put. This is a bullish trade where I collect $1 to open. Here I have a 85% theoretical chance of success. But if the price falls below my strike then I accrue losses below $167.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the COST Jun $173/$170 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 9% if successful.
There are no guarantees when investing in stocks, so I never risk 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.
