Option Strategy Ideas for Costco Wholesale (COST)

Costco Wholesale (COST) option strategies When the economy is shaky, consumers stock up on staples. So suggests the latest sales data from Costco Wholesale COST. The warehouse-style retailer said Thursday that same-store sales in August rose 7%, easily topping analysts’ estimated rise up 4.2%. The Midwest, Texas, and Northwest were particularly strong regions for the retailer. Internationally, sales were notable in Korea, Canada, and Japan.

COST moved higher in Thursday’s trading (closing at $58.59, up 80 cents). The stock has gained 8% from its August 24 low, overcoming its 50-day and 200-day simple moving averages (SMA) in the process. Does the stock have more rally potential or will the shares begin to settle lower with the sales news now out of the way?

For investors looking to learn more about option strategies that could complement their portfolios, we’ve outlined two potential trades below in Costco: a short-term long call for the bulls and a long put spread for the bears. These should not be viewed as trading recommendations but merely examples of different options trading strategies for educational purposes.

For a complete review of the strategies including profit/loss information, read below the link. All prices are as of Thursday’s close.

Bullish Option Strategy: Long Call

A long-call strategy could be considered for those with a short-term bullish view of the retailer. The September 57.5 calls, in the money by nearly $1, are priced for $1.41 per contract. By purchasing these calls, investors assume a maximum potential risk of 100% of the premium paid. The maximum loss is achieved at expiration if COST is trading below the strike price.

Between the strike and the breakeven price of $58.91 (the strike price plus the premium), the investor would get back at least a portion of the premium paid. Above the breakeven, gains are theoretically unlimited as the stock gains ground. Currently, this call has a delta of 66, meaning it should gain (or lose) 66 cents for every corresponding dollar move in the underlying shares. Delta will change rapidly though as time decay works its magic. The charts below are created in a virtual trading account.

Bearish Option Strategy: Bear Put Spread

Investors who have a bearish view of Costco could consider buying the October 60/55 put spread (buying the 60 strike, selling the 55 strike). The current debit for this spread is $1.91. This debit is the most an investor can lose, should COST shares be trading above the long strike ($60) when the options expire. Breakeven occurs at $58.09 (the long strike price minus the premium paid).

If COST is trading anywhere below breakeven at expiration, the spread will be profitable. Gains begin to build in the shares until the 55 strike, at which point the investor reaches the maximum profit potential of $3.09. The maximum potential reward is the difference in strike prices less the debit paid. This spread has a potential return on risk of 162%.

Costco (COST) bear put spread