On CNBC’s “Options Action,” Carter Worth said Costco Wholesale Corporation (NASDAQ:COST) is going to pop up on earnings. The company is going to report earnings on Thursday and the stock is trading close to its December highs.
Worth analyzed Costco from a technical standpoint and noticed a bullish wedge pattern and a hedge and shoulder bottom pattern on its chart. He sees the stock as a breakout candidate on the earnings catalyst and he is looking for a 3% to 5% move.
Mike Khouw said the stock is trading right now at a little more than 35.50 forward earnings and that is expensive as the range has been between 26 and 34, with an average multiple of 30. The options market is implying a 3.2% move in either direction, which is exactly what the company has averaged over the past eight quarters, said Khouw.
He expects to see a modest move higher in Costco after the report so he wants to use a calendar call spread to make a bullish trade. Specifically, he wants to buy the July $385 call for $10.30 and sell the June $400 call for $2.57. The trade would cost him $7.73, which sets the break-even at $392.73 or 3.15% above the closing price on Friday.
f the stock trades below $400 at the June expiry, the June $400 call would expire worthless so Khouw could sell another call to reduce the break-even level.
