Investors have deposited shares of FedEx (FDX) fell sharply on Friday as the company pre-announced weak revenue and earnings. Chief Executive Officer Raj Subramaniam said he expected the economy to enter a “worldwide recession.” Wall Street will be hoping for a different tone with retail stocks like Costco (PRICE) and Restaurants in Darden (DRI) ahead of the upcoming earnings report.
Despite good fundamentals, Costco stock has come under selling pressure as it tries to hold the 500 level.
Costco stock has a Overall Rating 85, thanks in part to high returns on equity and several consecutive quarters of double-digit revenue growth. Costco stock also has a Relative Strength Rating of 83 words Check out the IBD kho repositoryranked 2nd in its group.
Results from Darden restaurants – the parent company of Olive Garden, LongHorn Steakhouse and Yard House – will go into effect on Thursday before opening. The Zacks Consensus Estimate is for adjusted earnings of $1.56 per share, down 11% from the year-ago quarter. Search revenue grew 7% to $2.37 billion.
DRI stock looks slightly better than Costco stock as it consolidates near its 40-week moving average. Darden’s relative strength line has started trending higher after a nice bounce off the lows, but the 40-week line remains a potential resistance after Darden rejected it last month and struggles with it now.
Costco stock fades before results
Results from Costco will be available on Thursday after closing. Adjusted profit is expected to grow 5% to $4.11 a share, with revenue up 15% to $71.84 billion.
Late last month, Costco reported August sales of $17.55 billion, up 11% from a year ago. Same-store sales rose 8.7% for the month.
Costco stock reacted positively when the company reported earnings in late May. Shares rose nearly 6% on high volume despite falling margins due to rising shipping and labor costs. Earnings and revenue were better than expected, with adjusted profit up 2% to $2.91 a share. Revenue rose 16% to $52.6 billion. The company’s total same-store sales increased by an impressive 14.9%. On an adjusted basis, same-store sales increased 10.8%.
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Despite strong fundamentals, Costco stock has struggled to attract buyers after a brief breakout above 552.81 buy points. Costco briefly probed its 200-day moving average, rebounded above it for four sessions, then gave up Tuesday’s support on high volume.
FedEx (FDX) also reported Thursday after the close. FDX stock rallied above its 40-week moving average in June as investors welcomed its final earnings report. But sellers hit the stock hard on Friday after the company’s guidance income and revenue lower than expectations and drag its outlook.
Set up income
In the oil and gas sector, Ovintiv (OVV) reported early Monday. It forms a cup base with a handle with an entry of 56.41.
In other places, FactSet Research System (FDS) reported early Thursday. It is still trading near the 448.69 double bottom entry, but an alternative handle buy point of 457.09 is also valid.
Options trading strategy
A basic options trading strategy that revolves around earning using call options allows you to buy stocks at a predetermined price without taking on much risk. This is how the options trading strategy works.
First, identify the top-rated stocks using a bullish chart. Some may be set up in sound facilities at an early stage. Others may have broken through and are getting their support Line 10 weeks first. Some may be trading closely near the highs and not giving up many points. Costco stock is still far from highs, but another quarter of strong revenue growth could prompt another round of buying. Avoid stocks that extend too far from the appropriate entry points.
In options trading, a call is a bullish bet on a stock. A put option is a bearish bet. 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.
Call options are for underperformers with a bearish chart. The only difference is that the 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 make a profit when the stock falls below the strike price with the put option.
Strike Price Check
Once you’ve determined the earnings setup for a call option, like FedEx stock, check the actual price with your online trading platform or at cboe.com. Make sure the option is liquid, with a relatively tight spread between bid and ask. Find the strike price right above the underlying stock price (out of money) and check the premium. The premium should ideally not exceed 4% of the underlying stock price at the time. In some cases, the cash rate is OK as long as the premium is not too expensive.
Choose an expiration date that suits your risk goals. But remember that time is money in the options market. Dates closer to expiration will have a cheaper premium than days farther away. Buying time in the options market comes at a higher cost.
This options trading strategy allows you to take advantage of a positive earnings report without taking on too much risk. The risk is equal to the cost of the option. If the stock declines relative to earnings, the most that can be lost is the amount payable on the contract.
Costco stock options trading
When Costco closed Thursday at 503.50, a slightly out-of-the-money weekly call at 505 (expirs September 30) came with a premium of about $13.80 , or 2.7% of the underlying stock price at the time.
A contract that gives the holder the right to buy 100 Costco shares at 505 each. The most that can be lost is $1,380 – the amount payable for a 100-share contract.
Taking into account the premium paid, Costco would have to rise past 518.80 for the transaction to start making money (actual price 505 plus premium $13.80 per contract).
Remember that this is not a trade for a smaller portfolio. Buying 100 shares of Costco will cost $50.50.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight
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