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Options traders look for signs of life as earnings focus turns to Costco

Costco earnings on deck as options traders hope for signs of life
Costco earnings on deck as options traders hope for signs of life

Ahead of Friday's jobs report, one of the best ways to gauge the health of the U.S. consumer may be through the performance of some of the big consumer staples names.

As investors look for clues as to where the markets could be heading next, this week's slate of earnings might prove a valuable bellwether.

Investors caught a break when Pepsi's earnings report before the bell on Thursday beat expectations on both earnings per share and revenue.

The stock jumped more than 3% off the report, which included a better-than-expected organic revenue growth figure of 4.3%.

Now, the focus turns to Costco, which reports its own results after the closing bell on Thursday. There's been a flurry of activity around the stock, Risk Reversal Advisors co-founder Dan Nathan pointed out Wednesday on CNBC's "Fast Money."

"Obviously, the stock has been a massive outperformer — it's up more than 40% on the year. The options market is implying about a 5% move in either direction" after the earnings report, Nathan said.

Bullish call trading outpaced that of bearish puts by more than 2 to 1. However, Nathan isn't exactly optimistic on the staples retailer himself, noting that if Costco underperforms — or perhaps even doesn't substantially outperform expectations — the stock could have plenty of room to fall.

"The stock has outperformed, the company's doing really well — expected to post 14% year-over-year earnings growth next year — but set to decelerate next year while trading" at a 33x price-to-earnings multiple, said Nathan.

"When [Costco} broke out at that $250 level … earlier this year, it went up 20% in about a straight line. So to me, this is [a name where] we're seeing the big-box guys, there's a lot of concentration in them — Walmart, Costco and Target.

"This one, you know, you'd better not miss, because if it breaks that [downside support], where it's trading at 33-times that decelerating EPS number for next year, there's considerable downside."

Costco was trading slightly lower Thursday morning, at $284.21 per share.