Costco Wholesale Corporation: 7 Months Later, Update on COST Calls

It is another Wednesday and mid-week call options are in order as we continue with our exploration of possibilities in the options of companies operating in the retail industry. We continue our exploration today with Costco Wholesale Corporation (NASDAQ:COST).

Costco Wholesale Corporation with its market capitalization of $61.78B with its subsidiaries is engaged in the operation of membership warehouses in the United States and Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Australia, and through majority owned subsidiaries in Taiwan and Korea. Costco buys the majority of its merchandise directly from manufacturers and route it to a cross-docking consolidation point (depot) or directly to its warehouses.

Update on Previous COST Coverage

My first coverage on trading COST call options was in April in a post titled, “Go Long, Far And High With COST Calls”. In that post, I recommended buying the COST Jan 2015 115.000 call (COST150117C00115000) at a $5.34 asking price when shares of Costco were trading around $111.24 per share.

As at 1:43PM EST, shares of Costco were trading around $142.18 to mark a 27.81% increase in share price in the last seven months. However, as testament to the fact that buying options provides more upside potential than buying stocks, the COST Jan 2015 option that I recommended at $5.34 is now up to a $29.25 asking price to mark a 447.75% increase in seven months.

Why We Are Looking at Costco Today

Costco caught my attention today after company rose 1.29% to mark a new 52-week high of $146.94 to mark a 34.08% increase over its 52-Week low of $109.50. Shares of Costco rose to this new high today after the company reported better than expected first quarter (Q1 2015) results today. The highlights of the first quarter results are presented below:

Costco reported earnings $496 or $1.12 per share to outperform the $0.96 that was reported from the same quarter last year and to beat the consensus estimate of $1.09 per share. The earnings of $1.12 mark a 16.66% year over year increase and a 2.75% increase over the consensus estimate.

The company reported revenue of $26.87 and net sales of $26.28 to mark a 7% year-over-year increase from $26.28

Costco reported that same-store sales, excluding negative impacts from gasoline price deflation and foreign exchange, climbed 7% in the quarter. In the US, same-store sales, excluding fuel, climbed 7%.

The company’s revenue from membership fees gained 6% to $582 million, while its merchandise costs jumped 7% to $23.39 billion.

More Upside Potential Ahead

COST Chart

The chart above shows how the shares of Costco have been trading in the last six months. You will observe that the stock has been trading stubbornly northbound in the last six months. The red line shows the key resistant points that the stock has experienced in the last six months.

However, the key fact remains that the stock has been trading above its 50 and 200 day moving averages of $134.19 and 121.00 respectively. I am optimistic that Costco will be able to maintain its bullish ascent in the New Year based on the strong retail trends of this holiday season.

How to Trade Cost Options

I recommend locking in your profits on the COST Jan 2015 115.000 call with stop/limit orders at $29.00 in order to open ourselves up to further upside potential on the stock. If you are new to the Costco party, you should consider buying the COST Apr 2015 145.000 call (COST150417C00145000) at an asking price of $3.70.

— Daily Option Alerts

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