A price cut in Costco Wholesale (NASDAQ:COST) last week doesn’t add up to value just yet. But for investors using a below-the-market put credit spread on Costco stock, gaining that type of exposure is here today. Let me explain.
Most of us enjoy a good bargain. And Costco stock is now 5.5% cheaper than it was a day prior. But following last Friday’s earnings miss and management warning of failed financial safeguards within the company’s systems, COST is cheaper but it’s not a bargain, on or off the price chart.
By the numbers, Costco reported fourth-quarter profits of $2.36 per share. That’s up from 2017’s same quarter bottom-line of $2.08, but below forecasts of $2.40. At the same time sales beat views of $44.05 billion as revenues rose to $44.41 billion.
The truth is the miss wasn’t terrible, Costco stock is still growing its business and the confession about its flawed security, could have caused huge problems for Costco, which it didn’t. Still, the price chart has spoken and it differs from Wall Street’s cadre of supportive, but disregarded, words from analysts.
Costco Stock Weekly Chart
Following last week’s earnings-driven fallout, Costco stock is cheaper after breaking below a narrow and steep price channel. But cheap doesn’t represent value just yet. It’s our belief the aggressive trend of the past few months is going to act like COST’s own worst enemy as trapped bulls scramble to exit.
Looking ahead, on a technical basis COST would be a good deal more attractive if shares dropped into a price band from roughly $197-$210. There’s a cluster of various supports that could back up a bottom and Costco stock will have corrected by a fairly healthy 14% to 20%.
COST Stock Bull Put Spread
Given our view COST isn’t finished with its downside just yet, but that we’re also willing to see shares as a potentially attractive purchase if they trade down into our support band, a bull put spread makes sense.
An out-of-the-money vertical of this type reduces and limits risk and allows investors to buy shares at pre-determined and more opportunistic price levels. With Costco stock at $218.82 the ’23 Nov $205/$200 put spread for a credit of 60 cents is favored.
The strike placement of this combination is stationed within the detailed support area and offers a margin of safety in excess of 6% in COST before the credit would be at risk.
If Costco continued to drop, a move below $200 would expose this trader to a loss of $4.40. That’s the equivalent of having 2% long Costco stock risk. At the same time, the investor buying shares today would be sitting on a minimum loss of 8.6%. Bottom line, if you’re going to shop the drop in COST, this vertical looks like the right kind of merchandise.
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.
