Costco Wholesale Corporation (NASDAQ:COST) is slated to slip into the earnings confessional after the close of trading this afternoon. COST stock is on fire heading into the report, rallying more than 22% off its October bottom. However, the shares appear to be losing steam, and the COST stock price action could be a warning of a sell-on-the-news event following earnings.
By the numbers, Costco is is expected to report a quarterly profit of $1.34-per-share, up from earnings of $1.17-per-share a year ago. Meanwhile, revenue is seen rising about 12% year-over-year to $31.49 billion.
Expectations are surprisingly tempered among the analyst community. Specifically, EarningsWhispers.com reports that the whisper number comes in at $1.34-per-share, in line with the consensus.
Analyst ratings, however, are leaning firmly bullish. According to data from Thomson/First Call, COST stock has attracted 18 “buy” ratings, 11 “holds” and no “sell” ratings. The 12-month consensus price target, meanwhile, rests just overhead at $188.28.
Given this backdrop, there is ample room for both upgrades and price targets if Costco can top expectations. The problem is that COST stock is trading firmly in overbought territory following its recent blistering run higher.
What’s more, the shares have been met with staunch resistance in the $190 region, with Costco stock forming a double-top in the area in the past week.
Turning to the options pits, short-term traders are also quite bullish on COST stock. The December put/call open interest ratio arrives at a positive reading of 0.76, with calls outpacing puts among options most affected by tomorrow’s quarterly earnings report.
However, December implieds are pricing in a post-earnings move of only about 3% for Costco stock. This places the upper bound near $193, while the lower bound lies at $182.
Two Trades for COST Stock
Put Spread: With implieds historically low for COST stock heading into earnings, and the shares trading in oversold territory, a bear put spread could be quite profitable. However, trading options the week of earnings is not for the faint of heart, so pass on this trade if it doesn’t fit your risk tolerance.
Those traders with speculation running in their veins, however, might want to consider a Dec $182.50/$185 bear put spread. At last check, this spread was offered at 68 cents, or $68-per-pair of contracts. Breakeven lies at $184.32, while a maximum profit of $1.82, or $182-per-pair of contracts — a near-165% return — is possible if COST stock closes at or below $185 when December options expire at the close of trading tomorrow.
Put Sell: Another way to play COST earnings is to sell a deep in the money put option. Currently, the Dec $175 put sell has ample potential to finish out of the money.
At last check, this put was bid at 35 cents, or $35 per contract. As usual with a put sell, you keep the premium as long as Costco stock closes above $175 when December options expire tomorrow. On the downside, if COST trades below $175 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $175-per-share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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