Buy Signs are Flashing for This Bouncing Retail Stock

COST recently breached its lower Bollinger Band, which has been a bullish signal for stocks recently

Jun 30, 2017 at 11:54 AM
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Options traders have been actively targeting Costco Wholesale Corporation (NASDAQ:COST) of late. Through Wednesday's close, COST stock had seen some of highest total options volume over the previous two-week time frame, according to data from Schaeffer's Senior Quantitative Analyst Rocky White, with 433,560 contracts traded.

This theme is echoed in data from Trade-Alert, which shows COST's single-session options volume hitting an annual high of 185,483 contracts on Friday, June 16, with 98,844 calls and 86,639 puts traded. Plus, Costco call and put open interest are docked at the top of their respective 12-month ranges, with 176,618 calls and 217,898 puts currently outstanding.

Drilling down, peak open interest is found at the weekly 6/30 160-strike put, where 11,115 contracts reside. The bulk of these positions were initiated two weeks ago, when one trader combined these options with the weekly 6/30 165-strike puts to initiate a put ratio spread. The best-case scenario for this options trader is for COST to finish right at $160 at tonight's close -- site of the sold strike -- with the stock last seen trading at $159.39.

On the call side, peak open interest is located at the July 170 strike, with 10,358 contracts outstanding. Data from the major options exchanges confirms significant buy-to-open activity here, meaning options traders are betting on Costco shares to settle north of $170 by the close on Friday, July 21 -- when front-month options expire.

The last time COST saw the north side of $170 was on June 16, shortly before the retail stock gapped lower on news that Amazon is buying Whole Foods. Nevertheless, the shares seem to have stabilized after breaching their lower Bollinger Band -- a "buy" signal over the past year -- and appear to be bouncing from their 200-day moving average, a trendline that kept a lid on Costco late last year. 

Plus, Costco stock is entering a historically bullish period. Per data from White, COST has been one of the best stocks to own in the third quarter, averaging a gain of 6.2% over the past 10 years, and ending higher 80% of the time. In the second half, the security has also tended to outperform, averaging an 11.4% gain and a 90% win rate!


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