Carter Worth And Mike Khouw's Costco Options Trade

On CNBC's "Options Action," Carter Worth said Costco Wholesale Corporation 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.