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Russian (RU) Shares of Costco Wholesale (COST) have lost their shine this year. On Monday, Costco stock traded down 1% for the year while the S&P 500 has climbed nearly 15%. Investors who expect further weakness in Costco stock can use an options bear put spread to express this view.
That underperformance by Costco stock deepened after the deep discount chain failed to break out of a cup-with-handle pattern in early June, leading to a steady decline since.
Third-quarter results reported on Sept. 26 did little to ease investor concerns. Although earnings per share of $5.87 and revenue of $86.16 billion both edged past consensus estimates of $5.80 and $86.06 billion, respectively, the market's reaction remained muted.
Costco's core business continues to grow, with membership fee income — its most important profitability driver — rising 14% year over year. That strength highlights the loyalty of its customer base, even after the company implemented its first annual fee increase since 2017 last fall.
However, investor unease is mounting over the potential impact of tariffs and whether the wholesale giant can sustain growth robust enough to justify its steep price-to-earnings ratio of 51, based on trailing four-quarter profits. Any further hints of deceleration of growth or margin pressure will undoubtedly hurt Costco shares, which are still priced to perfection.
Constructing A Bear Put Spread On Costco Stock
In constructing a bear put spread, an investor buys a put option while also selling a lower strike put option. In the case of Costco stock, investors can consider a bear put spread by buying a 900-strike put option while selling the 880 put on the Nov. 21 expiration.
This trade can currently be placed for a debit of around $7 per set of contracts, or $700. This also coincides with the maximum loss of $700 an investor will experience if shares are above 900 on expiration.
The maximum profit is the width of the strikes minus the debit paid. In this case (20-7) x 100 = $1,300 per set of options. Investors will realize this maximum profit if shares of Costco trade below 880 on expiration.
Want More Actionable Option Trade Ideas? Go Here
The Ratings
Costco currently has an IBD Composite Rating of 46. Shares have been trending lower. In recent weeks, Costco stock has fallen further below both the 50- and 200-day moving averages.
Costco's Relative Strength Rating of 24 is very poor. It means Costco stock has beaten less than a quarter of all stocks in the IBD database over the past 12 months.
Steven Bell is a writer and trader based out of Vancouver, British Columbia. He is the author of IBD's Income Investor column, focused on shedding insight on low-risk, underfollowed stocks.
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