Sellers swarmed to Costco shares on Thursday after the company signaled a slowdown in November selling. But it was a different story for LULU shares, which attracted buyers amid expectations for another strong earnings report.
costco (COST) e Lululemon (LULU) are next on the earnings register, along with broadcom (AVGO), which edged above its 200-day moving average on Wednesday on high volume. Semiconductor stocks were among the biggest gainers Wednesday after Federal Reserve Chairman Jerome Powell reaffirmed the Fed’s intention to slow the pace of interest rate hikes.
Costco shares are holding the key support level
Costco stock plunged below its 200-day line Thursday after the company reported November revenue of $19.17 billion, up 5.7% year over year. But that was a slowdown from growth of 7.7% in October and 10.1% in September. Investors were also spooked by a 10% drop in e-commerce sales, far worse than October’s 0.7% loss.
The retailer fell sharply on Sept. 23 after the company reported an 8% increase in quarterly profit. Revenues increased 15% to $72.1 billion. But margins have been reduced, penalized by the increase in transport and labor costs. Gross margin of 10.2% decreased from 10.9% for the same period a year ago.
Costco reports earnings Thursday after the close. Zacks’ consensus estimate calls for adjusted earnings to rise 39% to $4.12 per share, with revenue up 9% to $55.06 billion.
Earnings Watch: LULU, AVGO, OLLI
LULU shares rose on Sept. 2 after the company posted another quarter of strong top and bottom growth. Profit jumped 33% to $2.20 a share. Revenues increased 29% to $1.87 billion. Direct-to-consumer revenues increased 30%, accounting for 42% of total revenues.
Commenting on the results, CFO Meghan Frank said, “Despite the challenges surrounding us in the macro environment, guest traffic to our stores and e-commerce sites remains robust, which demonstrates the strength of our multidimensional operating model.” .
In April, Lululemon revealed plans to double its 2021 revenue from $6.25 billion to $12.5 billion by 2026. It also aims to double male and digital revenue and quadruple international revenue over 2021.
Results are expected late Thursday. Profit is expected to rise 20% to $1.95 a share, with revenue rising 24% to $1.8 billion.
Even in the retail sector, Ollie’s Bargain Outlet (OLLI) reports Wednesday before opening. The stock held on to gains well after a breakout of a trendline on Nov. 22. In the latest reported quarter, revenues increased 9% to $452.5 million. For the current quarter, revenue is expected to increase 12.5% to $431.4 million.
In the chip business, Broadcom also reported late Thursday. The company’s impressive line of semiconductor products accelerate data movement in data centers, telecommunications, embedded networking and business applications.
The stock just moved on Thursday after a bullish gain on Wednesday, a sign of strength and support.
Broadcom’s revenue growth accelerated for three consecutive quarters, from 16% to 23% to 25%. Revenue for the current quarter increased 20% to $8.9 billion.
Options trading strategy
A basic earnings options trading strategy, using call options, allows you to buy a stock at a predetermined price without taking much risk. Here’s how the options trading strategy works and what a recent Home Depot options trade was like.
First, identify the highest-ranking stocks with a bullish chart. Some may settle into a solid foundation early on. Others may have already broken out and are receiving support at their 10-week moving average for the first time. And some may be trading tightly near the highs and refuse to give up much ground. Avoid extended stocks that exceed the correct entry points too much.
Costco stock could be a candidate for a call option trade, although its technical picture has weakened following Thursday’s sell-off. However, Costco stock is trading towards the 500 level and holding above its 50-day moving average. Costco bears may also be considering a put option.
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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. A call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.
You earn profits when the stock falls below the strike price with a put option.
Check the strike prices
Once you have identified an earnings setup for a call option, check the strike prices with your online trading platform or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.
Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying share price at that time. In some cases, an in-the-money strike price is fine as long as the premium isn’t too high.
Choose an expiration date that fits your risk objective, but keep in mind that time is money in the options market. Short term expiration dates will have cheaper premiums than those further out. Buying time in the options market costs more.
Find out which stocks are in the ranking portfolio
This options trading strategy allows you to capitalize on a bullish earnings report without taking too much risk. The risk is equal to the cost of the option. If the stock falls on earnings, the most you can lose is the amount paid on the contract.
Trading in Costco stock options
Here’s what a recent call options trade for Costco looked like.
When Costco stock traded around 504, a slightly out-of-the-money weekly call option with a strike price of 505 (expiring Dec. 16) came with a premium of about $14.65 per share per contract, or 2.9% of the current underlying share price.
One contract gave the holder the right to buy 100 shares of Costco stock at 505 a share. The most that could be lost was $1,465, the amount paid for the 100-share contract.
Taking into account the premium paid, Costco would need to break above 519.65 for the deal to start earning (strike price of 505 plus a $14.65 premium per contract).
A put option for Costco could also make sense. Using the same strike price with the same expiry, the premium was approximately $15.
One contract gave the holder the right to sell 100 shares of Costco at 505. This means that Costco would have to drop below 490 for the deal to make any money.
Follow Ken Shreve on Twitter @IBD_KShreve for more analysis and insights into the stock market
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