The first observation of the $B^0_stobar{D}^0 K^0_S$ decay mode and evidence for the $B^0_stobar{D}^{*0} K^0_S$ decay mode are reported. The data sample corresponds to an integrated luminosity of 3.0 $text{fb}^{-1}$ collected in $pp$ collisions by LHCb at center-of-mass energies of 7 and 8 TeV. The branching fractions are measured to be begin{align*} mathcal{B}(B^0_stobar{D}^0 bar{K}^0) &= (4.3pm0.5(text{stat})pm0.3(text{syst})pm0.3(text{frag})pm0.6(text{norm}))times10^{-4}, mathcal{B}(B^0_stobar{D}^{*0} bar{K}^0) &= (2.8pm1.0(text{stat})pm0.3(text{syst})pm0.2(text{frag})pm0.4(text{norm}))times10^{-4}, end{align*} where the uncertainties are due to contributions coming from statistical precision, systematic effects, and the precision of two external inputs, the ratio $f_s/f_d$ and the branching fraction of $B^0tobar{D}^0 K^0_S$, which is used as a calibration channel.