Costco Earnings Play

Costco reports earnings prior to the open on Wednesday. Earnings can always be a catalyst to move a stock. This stock has been giving a few clues over the last few weeks as to where is wants to head. The daily chart below had a couple of attempts to hold printing an inverted hammer and a doji the last two days, but it is not confirming a reversal today. There is support lower at 77.50

and then 75 and 72 followed by 69.50. Any bounce should see resistance at 83. The Relative Strength Index (RSI) is heading sharply lower now and the Moving Average Convergence Divergence (MACD) indicator is crossed negative, supporting more downside. The weekly chart more clearly shows the support at 77.50 from June and then next levels down, listed above. It also has a RSI that is moving lower and a MACD that is just crossed negative. It also defines resistance higher at 84 as a top.

The options board leading into earnings shows the nearest Expiry, October 21, more than two weeks away with the Implied Volatility in the front month not elevated over the out months. A volatilty sale is not the right play here. The continued directional play is the trade for earnings.

Trade Idea: Buy October 77.5/72.5 Put Spread. Fund this with a sale of an October 85 Call to reduce the price.

The straight Put Spread buy, buying the 77.5 Strike and selling the 72.5 Strike, was offered at 1.33 when I wrote this. Selling the 85 Strike Call for 93 cents, reduces the cost to 40 cents, but requires margin and has unlimited loss potential if it moves above 85 by Expiry. This can be mitigated by buying the stock on a break above 83.7, which would turn the chart bullish. The it can be called away from you at 85 for a $1.30 profit.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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