UPDATED: NIKE Reports Earnings Tonight-The Implied Move Looks Cheap

by Dan March 17, 2011 10:22 am • Commentary


UPDATE 3/18/11 @ 8:46am: fiscal Q3 earnings and guidance were worse than expectations and clearly disappointed investors as the stock is trading at $79 in the pre-market  (down ~7.5%).  Not only did sales miss expectations, but gross margins were were hit by higher costs associated with rising oil, cotton, labor and airfreight.  This trend likely to remain through the end of their fiscal year.

-As for yesterdays trade suggestions, a little housekeeping;

1st Buying the Move, Buying Mar 85 Straddle for ~3.60, this will be a profitable endeavor.  On the open the Call will be worthless but the Put will trade like stock with any extrinsic value melting away every moment as we get closer to expiration on the close today…..If you are long the Straddle treat it as if you are short stock, cover (sell the 85 Put that you own) when you think the sell-off is overdone and/or you are happy with the profit and move on.

2nd Express Bearish Views by Buying March Put Spreads: Buy Mar 85 / 80 Put Spread for $1.50….This structure will also be profitable with the stock at 80.00….similar to above, treat this spread as if you are short stock and unless the stock appears that it will meaningfully close below 80 (the strike that you are short) you may want to consider selling so that you don’t have to deal with being put the stock on expiration unless you want remain short the stock.

I think this is a great example of identifying an event and looking at it from both a quantitative and qualitative standpoint.  I started by looking at the earnings event in NKE with the intention of arriving at a view on the direction the stock would take after the event……while looking at the story fundamentally I identified some areas that I thought could cause some volatility post call which led me to look at the options market which appeared to be underpricing the expected move given the stocks historical behavior around such events and the macro environment…..Last part of the exercise is to identify the best structure and time horizon in which to express the view, which is why i suggested a couple different trades depending upon your inclination to be more of a vol guy or a fundamental directional gal.

From 3/17/18:

NKE $85.30

-company reports fiscal Q3 earnings after the close tonight

-options market implying about a 4% move which is generally in line with its 4 qtr avg move of ~4.5%.

-Given the recent spike in short-dated volatility the move into earnings seems to be a little cheap.

** as a quick note to figure out what the implied move is on expiration week around an event, an unscientific, but mostly accurate way would be to take the at the money straddle, in this case the Mar 85 straddle, which is offered at 3.60 and divide it by the stock price 85.30 (but deduct the intrinsic value .30) which gives u roughly 4%…..so basically to break-even on owning the straddle the stock would have to move 3.60 higher or lower than 85, thus the implied move.


-stock flat on the year after selling off almost 7% from highs made earlier in the month…..

-street is fairly bullish on the name with 12 Buys, and 6 Holds and no Sells.


-on Mar 2nd Foot Locker reported strong earnings and reported comp sales grew high-single digits throughout 2H10 and inventory grew for the first time since 2007, which leads one to believe that future orders are coming in strong…..FL is a big retailer for NKE in North America and this should bode well for them….


-Quarter is likely to be just fine give FL’s commentary and that of competitor Adidas that also reported decent results earlier in the month…..BUT

-when the company reported Q2 results in Dec, they “witnessed revenue growth across all geographic regions, except Japan and Western Europe. In Japan and Western Europe, revenue plunged 14% and 7%, respectively. Revenue growth was primarily led by emerging markets (namely, Brazil and India), which rose 24% year over year, followed by growth in China, Central and Eastern Europe, and North America of 20%, 7%, and 14%, respectively. ”

-I am no economist but i have to assume given the reaction in the Nikkei and the Dax earlier in the week that investors are expecting some serious economic slowdown for the time being, and while that is not a surprise in Japan, the Dax’s reaction being down 5.5% Tuesday morning certainly was to me.

-This will be one of the first opportunities for US investors to ask a large multi-national about how this disaster will affect sales…..NKE’s answers could cause volatility in the stock tomorrow.

-1ST TRADE: BUY THE MOVE-–If you agree that the guidance and commentary could cause volatility post earnings call then the atm straddle looks cheap and probably best way to play for that.


-Buy 1 Mar 85 call for 1.90 and

-Buy 1 Mar 85 Put for 1.70

Break-Evens on Mar Expiration (Tomorrow):

Upside: between 85 and 88.60 (up ~4%) you can lose up to the 3.60 in premium that you paid, above 88.60 you profit.

Downside: between 85 and 81.40 (down 4.5%) you can lose up to the 3.60 in premium that you paid, below 81.40 you profit.

-2nd TRADE: IF YOU HAVE A BEARISH VIEW INTO EARNINGS, AND THINK THE MOVE IS CHEAP BUY MAR PUT SPREADS, risk less than 2% of underlying, but you define your risk.

BUY NKE Mar 85 / 80 Put Spread (stock around 85.10) for $1.50

-Buy 1 Mar 85 Put for 1.80 and

-Sell 1 Mar 80 put at .30

Break-Even on Mar Expiration (Tomorrow):

Upside: btw 83.50 and 85 you lose up to the 1.50 in premium you paid, above 85 on the close tomorrow you lose all 1.50 or less than 2% of the underlying.

Downside: btw 83.50 and 80 on tomorrows close you can make up to 3.50, below 80 (down ~6%) you make 3.50 or more than 2x your money or 4% in a day….