On Friday’s Option Action Mike Khouw and Carter Worth laid out a bearish thesis and trade structure in NKE.
‘To Sum Up their View:
-Carter feels that while the stock’s rally back from the March low is pretty impressive, that there is likely to be selling pressure at this level and will be difficult for the stock to get through.
-Mike feels that vol is cheap and skew is steep and wants to look to July expiration that captures earnings. RL‘s comments last week about rising input costs should flow over to NKE and thus continue to pressure gross margins….Mike notes that NKE trading at 20x earnings and 11.5 ex/ebitda looks fairly priced given the expected earnings and sales growth of only ~10% in fiscal 2012. Mike wants to make a bearish bet into earnings, betting that the likelihood of the company to control some of the trends that led to the disappoint in the last report aren’t likely to abate anytime soon.
MIKE’S TRADE:
NKE (~$84.55) Buy July 82.50 / 75 Put Spread for ~1.50
-Buy July 82.50 put for 2.05 and
-Sell July 75 Put at .55
Break-Even on July Expiration:
Downside: stock btwn 81 and 82.50 lose up to 1.50, stock above 82.5 lose all 1.50.
-Btwn 81 and 75 make up to 6.00 and below 75 make 6.00 or 4x your money.
Mike Notes that the premium at about 20% the width of the spread he likes the risk/reward.
MY TAKE: I like this trade and agree that a company like NKE has very few options when trying to control input costs and usually this takes more than a quarter or 2 to get under control….also given their sales trends and the ever increasing potential for a second half slowdown, I see a company like NKE as vulnerable…..
If the news is incrementally better than last quarter I would expect the stock to have a muted move, but if guidance is disappointing for a second quarter in a row I would expect a test of the March lows.
[caption id="attachment_2276" align="aligncenter" width="300" caption="1 Yr NKE chart Provided by Bloomberg LP"]
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One way to play for a big move back to the previous lows would be a July Put Fly, lower probability of success but a lot more bang for your buck if you get that move…..
DAN’s TRADE:
NKE (~$84.26) BUY the July 80/75/70 Put Fly for ~.50
-Buy 1 July 80 Put for 1.35
-Sell 2 July 75 Puts at 1.10 (.55 each)
-Buy 1 July 70 Put for .25
Break-Even on July Expiration:
-stock above 80 lose .50
-Stock btwn 80 and 79.50 lose up to .50,
-stock bwtn 79.50 and 75 make up to 4.50
-stock 75 make 4.50
-stock btwn 75 and 70 payout trails off
-stock below 70 lose .50