Go Long Costco Wholesale Corporation (COST) Stock for Free

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Costco Wholesale Corporation (NASDAQ: COST ) is down 15% since its June highs. But I don't lump it with the carnage of the retail sector in general. The recent fall in Costco stock came after a strong rally, so year-to-date, it's flat.

And in retail, flat is the new up.

The June correction in COST stock happened because it got caught in a fierce retail selling storm after, Inc. (NASDAQ: AMZN ) announced it was buying Whole Foods Market, Inc. (NASDAQ: WFM ). The idea of Amazon having a 400-plus-store brick-and-mortar presence scared the bids out of retailers. Shareholders were sitting on profits, so they hit the sell buttons fast.

Wal-Mart Stores Inc (NYSE: WMT ) reported earnings this morning, and the negative reaction in WMT stock should also affect Costco. But overall, the warehouser continues to execute on its plans with precision. COST rarely gives Wall Street reason to doubt the company's future.

Fundamentally, Costco stock is not cheap if you compare it to retailers in general. But I put it and others like WMT and Starbucks Corporation (NASDAQ: SBUX ) in a special retail sandbox. These are long-term winners that are still thriving, unlike others such as Macy's Inc (NYSE: M ) that are merely struggling to survive.

Click to Enlarge I am a long-time fan of the stock and the stores. I've noticed changes management has made to offset the AMZN effect, and I like that Costco is being proactive rather than hoping things work out for them. So I will continue with my strategy for trading COST, which is going long several times a year for easy profits.

Technically, there is good news, and some reason for caution.

The good news is that Costco stock bounced off $150, and since then, it's setting higher lows attacking a neckline. If shares break through that, the bulls will overshoot to retest $166.

The caution is that the battle here is in a zone of contention. So I can't just assume the bulls will prevail to fill the upside potential. I don't trust the potential enough to buy and hope. So, instead of buying COST stock, I would sell downside risk against support to generate profits out of thin air.

How to Trade Costco Stock

The bet: Sell the COST Jan 2018 $130 put naked and collect $1 to open. Here I have a 90% theoretical chance that price will stay above my strike so I can book maximum gains. Otherwise, I will own the shares and accrue losses below $129.

Even though I have a healthy buffer from current prices, selling naked puts requires significant margins. Those who want to mitigate the risk can sell spreads instead. Their maximum loss is limited to the width of the spread less what I collect to open.

The alternate bet: Sell the COST Jan 2018 $133/$130 credit put spread for 30 cents. Here there is much less money at stake, yet the trade still yields 10%.

Both trades have about the same odds of success, and neither requires a rally to profit. In fact, I can still come out a winner even if Costco stock falls by 15%.

I don't like to buy and hope for rallies. That's why I prefer selling the puts versus risking almost $160 to buy COST shares outright, without any room for error, and expecting a rally to profit.

Investing in the stock market doesn't come with guaranteed results, so never risk more than you can afford to lose.

Learn how to generate income from options here . Nicolas Chahine is the managing director of . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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