Costco looks appealing but not a buy yet, trade the options instead

Costco (COST) shares have dropped recently from a high around $170 to $164, despite a strong general market in the US. Macro trends at Costco remain strong with sales growth, product mix and margins. We could see a further pull back in the stock from this point, especially considering that they continue to face issues with their new Citibank credit card relationship. Consumers have been quick to point out the pain associated with switching from Amex to Visa. However, we believe these issues won't affect the company's longer term performance. They report earnings on September 29, and generally Costco has performed well against guidance.

We are selling the October $150 Puts on Cost for $1.10, and believe that this provides a solid safety margin from the current share price of $163.80. If shares remain above $148.90, we profit from the Puts expiring.