Costco stock looks incredibly strong at the moment and bounced off the 21-day exponential moving average last week.
One way to take a bullish exposure without risking too much capital is via a bull call spread. This might be a good in the current market.
A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to the April expiration, a 675-strike call option traded around $21.20 late Friday, and the 680 call was around $19.
Costco Stock Max Profit $280
Buying the 675 call and selling the 680 call would create a bull call spread. The trade cost would be $220 (the difference in the option prices multiplied by 100). The maximum potential profit would be $280 (the difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk-defined strategy. So if Costco stock closes below 675 on April 19, the most the trade could lose is the roughly $220 premium paid.
Potential gains are also capped above 680. So no matter how high Costco stock might go, the most the trade could profit is $280.
The break-even price for the trade is equal to the long call strike plus the premium, which in this case equals 677.20.
Costco Stock Trade Management
In terms of trade management, if the stock dropped below 630, I would consider closing early for a loss.
According to the IBD Stock Checkup, Costco stock is ranked No. 1 in its group and has a Composite Rating of 92, an EPS Rating of 93 and a Relative Strength Rating of 88.
Costco is due to report earnings in early March, so this trade would have earnings risk if held until then.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
