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This morning I am recommending a bearish trade on Costco Wholesale Corporation (NASDAQ:COST).
COST is scheduled to announce earnings at the market close today, so this trade does have some additional headline risk on that front.
Over the past four quarters, COST has beaten on earnings per share (EPS) in three of them. However, in the most recent report, COST only matched expectations for earnings of $2.36 per share.
That’s a decent track record, but even if COST earnings come in above expectations this afternoon, I do not expect shares to trade above resistance.
COST made a 52-week high of $245.16 in mid-September, which should act as strong resistance on any rallies.
The stock started to recover in early November, but it formed another lower high near $241 and has dropped from that level since then.
Daily Chart of Costco Wholesale Corporation (COST) — Chart Source: TradingView
Because COST has generally performed well this year, earnings expectations are high. But the relatively bullish fundamental outlook doesn’t mean the stock will be able to beat resistance at its recent highs.
It has also been hovering around its 50-day moving average since November, and the share price may continue to channel sideways.
By selling the short leg of this credit spread at the $245 level, we can collect premium without too much risk. And as long as COST stays below $245 by expiration, we will walk away with full profits for this trade.
For these reasons, I am recommending a call credit spread on COST.
Using a spread order, sell to open the COST Dec. 28th $245 call and buy to open the COST Dec. 28th $257.50 call for a net credit of about $0.45.
I recommend that you close this position and limit losses if COST trades above $245.50 prior to the Dec. 28 options expiration.
A call credit spread is a bearish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
The ideal outcome in a credit spread is for both options to expire worthless, allowing us to keep 100% of the credit we collected at the start of the trade.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.