Call Buyers Blitz Costco Stock Ahead of Earnings – Schaeffers Research (blog)

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Costco Wholesale Corporation (NASDAQ:COST) is scheduled to report fiscal fourth-quarter earnings and September sales data after the U.S. stock market closes next Thursday, Oct. 5. Over the past eight quarters, the shares have averaged a single-session post-earnings move of 2.8%, with the options market pricing in a slightly bigger swing of 3.5% this time around. The majority of the time, COST stock has closed higher — and it looks like options traders are betting on another positive earnings reaction.

Over the past 10 sessions at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), options traders have bought to open 12,373 calls on Costco, compared to 5,770 puts. The resultant call/put volume ratio of 2.14 ranks in the 95th annual percentile, pointing to a relatively unusual bullish bias.

The stock’s October 165 call has been one of COST’s most active options over this period, with nearly 4,600 contracts traded. This strike is now home to nearly 4,750 contracts, and data from the major options exchanges confirms mostly buy-to-open activity here. In other words, traders expect the stock to be sitting north of $165 when the front-month options expire at the close on Friday, Oct. 20.

Those wanting to place last-minute pre-earnings bets on Costco are having to contend with inflated implied volatility (IV) levels. The stock’s 30-day at-the-money IV is currently perched at 18.9% — in the 75th annual percentile. This suggests short-term options premiums are relatively pricey at the moment, and could make it difficult for traders to take full advantage of options leverage.

Looking at the charts, COST has tacked on 9.7% since skimming the $150 level in late August — a level that served as a floor for the shares in June — but is running out of steam near the $165 level. This region coincides with the stock’s mid-June post-bear gap lows, with Costco shares last seen trading at $164.90.

Nevertheless, the security is heading into a historically bullish period, with COST as one of the best stocks to own in the fourth quarter on the S&P 500 Index (SPX). According to data from Schaeffer’s Senior Quantitative Analyst Rocky White, Costco has averaged a fourth-quarter gain of 5.72% over the past 10 years, boasting an 80% win rate.

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