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3 Options Strategies To Play Costco's Earnings This Week

Costco Wholesale Corporation (NASDAQ: COST) was volatile on Monday, as traders were anticipating the potential ramifications that coronavirus could have on the company's bottom line.

Benzinga · 03/03/2020 16:41

Costco Wholesale Corporation (NASDAQ: COST) was volatile on Monday, as traders were anticipating the potential ramifications that coronavirus could have on the company's bottom line. The stock will likely attract even more attention later this week, as the company is due to report earnings for the December quarter on Thursday, March 5 after the market closes.

Dating back to 2016, Costco’s earnings tend to be mixed compared to analyst estimates. The company has beaten the Street’s consensus estimate on both earnings per share and revenue in the same quarter just five times in the last 20 quarters. More often than not, the company comes up short on one of those two metrics.

But beating or missing Wall Street’s estimates is not always indicative of how the stock will react.

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Source: Benzinga Pro

How Costco Historically Moves Ahead Of Earnings

In the table below from options research platform Market Chameleon, you can see how COST has historically moved before each of its previous 12 earnings reports.

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Source: Market Chameleon

Notice the stock’s inconsistent performance leading up to earnings. Shares of Costco, on average, trade lower in the one-week, three-day, two-day, and one-day periods heading into an earnings report. And the stock has roughly the same number of positive and negative performances in the run-up to earnings over the last 12 quarters.

How Costco Historically Moves The Day Of Earnings

Interestingly, COST has a negative reaction to earnings far more often than it has a positive one. Unlike Roku Inc (NASDAQ: ROKU) (which tends to open higher after earnings), shares of COST have opened down an average of -0.8% after the last quarterly 12 reports, and have opened lower 75% of the time.

In all the stock’s absolute average post-earnings opening gap—meaning the average move it makes at the 9:30 am open the following morning—has been +/- 2.6% in either direction.

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Source: Market Chameleon

How Costco Historically Moves After Earnings

If the last few years are any indication, Costco’s earnings reports usually make for good buying opportunities.

The stock trades higher more often than not in the one-day, two-day, three-day, one-week, and two-week time horizons after an earnings report. With the exception of three of bad performances in the last four years, COST has almost always traded higher after earnings.

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Source: Market Chameleon

You can see that Costco shares appear to gain more momentum the further out you go. Its average performance in the two weeks after earnings is a 1.9% gain, by far the strongest of any of the post-earnings periods. The absolute average return of +/-3.4%, suggesting the post-earnings trend becomes more pronounced as time goes on.

3 Options Strategies You Can Use To Trade Costco’s Earnings

Ahead of Costco’s earnings, here are the top three options strategies with the highest theoretical edge—meaning the expected average return per trade is greatest based on calculations of historical data—according to Market Chameleon.

The cards below show what each trade involves.

The most important thing to note on each card is the difference between the market price, the option strategy’s current value, and theoretical value, the strategy’s value based on historical data. The trades with market prices lower than the theoretical value are being offered at a discount, while a higher market value indicates the trade is more expensive than historical prices.

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Source: Marketchameleon.com

Go to Market Chameleon for more information on how to use each of these strategies ahead of Costco's earnings.

Photo credit: Mike Mozart, Flickr