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We are recommending a bullish put write on Costco Wholesale Corporation (NASDAQ:COST), which has continued to look very defensive since we took profits on our COST July 12th $255 put write in late June.
From an economic perspective, we think the consumer cyclical and consumer defensive areas offer the best growth prospects. Spending and hiring are still very good in the U.S., and discount retailers like COST or Target (NYSE:TGT) give us exposure to both sectors.
Late last month, we recommended a trade on TGT. We collected profits on that trade in just 11 days, and if COST trends flat or continues rising in the next month, we may be able to roll this trade out just as quickly.
Protection From Earnings Season
Earnings season is starting next week. The big banks, tech companies and industrial stocks will start reporting, and we generally don’t like to hold positions through earnings. While a positive report can send a stock soaring, which is good for a put write position, counting on earnings increases uncertainty surrounding a trade, making it riskier.
Retail companies like COST report very late in the season compared to companies in other sectors. In fact, COST doesn’t report until October 3, 2019.
If we pick an expiration sometime before then, we can collect income without worrying too much about dramatic movements in the stock. To see why, we need to look at COST’s chart.
Resistance at $267.50 Could Become Support
From a technical point of view, COST’s price trend still mirrors its fundamentals. The company has reported a positive earnings surprise in both of its 2019 reports, and the stock has been rising accordingly. It doesn’t show any signs of slowing down.
Daily Chart of Costco Wholesale Corporation (COST) — Chart Source: TradingView
COST has short-term support at just under $264, and it just broke above resistance at $267.50.
If resistance at $267.50 becomes support, it could head even higher. That makes the former resistance level a good strike price in our trade. Even if the stock dips below $267.50, there is enough premium in COST options to make the risk/reward picture for a put write appealing.
To find out which COST puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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