Costco Wholesale Corporation (NASDAQ:COST) is known for the kind of price cuts consumers love to shop for. But on the COST stock chart, a more costly price tag still catching investors’ wallets demands bargain hunting with a well-designed modified call spread. Let me explain.
Most of us enjoy a good discount. And that attention to consumers’ needs has been paying off for Costco investors of late. But it hasn’t always been the case. Not so long ago, Wall Street was displaying more than a bit misplaced and weak in the knees behavior in COST stock due to worries retail’s 800 lb. gorilla, Amazon.com, Inc. (NASDAQ:AMZN), was muscling in on Costco’s business.
Now and with COST stock breaking out to fresh all-time highs, that narrative of fear has been replaced by more cheerful sales data pointing to a company not so easily torpedoed by Amazon’s ever-growing reach and dominant market position. Will the good times for Costco investors continue? For those willing to wait, the company’s next earnings confessional at the end of May should provide some additional clarity on what the future holds.
Alternatively and if we’re to believe charts are leading indicators of still-private information, the COST stock is a bit pricier these days, but also showing sure signs shares could become even more expensive in the weeks ahead.
Costco Stock Weekly Chart
On the weekly price chart, COST stock may not be a bargain-hunting bull’s dream situation, but shares do look technically compelling to move to fresh all-time-highs. Following a series of corrective bases within a fairly supportive uptrend over the last couple years, in late 2017 COST embarked on breaking above its existing channel resistance to fresh highs.
The aggressive price action worked briefly with Costco shares bursting out of a small base in early 2018 before failing. The good news is the resulting corrective base successfully held a challenge of the prior highs and between the 38%-50% retracement levels. Now and with COST stock breaking out of a high level cup-shaped base, shopping the options market to own today’s more costly, but trendy merchandise is looking like a smart business practice for investors.
COST Stock Modified Bullish Butterfly
Given our bullish stance, but not seeing COST stock as an outright bargain, one inexpensive strategy available to investors is using COST stock’s options to purchase a modified call butterfly spread. With shares at $199.50, the June $203/$210/$213 call combination for $1.65 and less than 1% of the holding risk associated with long stock is favored.
With this modified butterfly profits on an expiration basis start above $204.65 and max out at $5.35 if COST lands squarely at $210 on expiration. Also attractive, unlike a regular butterfly this combination remains profitable if Costco rallies above the spread. This means above $213 the investor keeps a profit of $2.35, rather than losing the debit paid.
Lastly, there is an earnings event in late May. That could easily make this COST spread look like an even better deal. Profits might be more modest, but that’s much more appealing than a loss in the face of too much optimism. Alternatively, if investors opt for taking profits, the forfeited money paid for a temporary membership as a card carrying Costco bull could look like pocket change that was very well spent.
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.
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