About a month ago I suggested the following trade in NKE when the stock was $84.26 (about $2.00 higher):
From 5/31/11: 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
This can now be sold for a small profit at .70…..The stock traded as low as 80 since suggesting and really looked like it was going to breakdown. The stock held important support and acts well into tonight’s earnings announcement…..this is a tough one here and honestly I don’t have a ton of conviction one way or the other at this point and will likely take half of the position off before the close.
When I looked at the story, a short trade fit my market thesis and there was a definable event that I thought could yield some volatility. Days like today (rallies for no reason other than because we are over-sold) take the life out of you when you are short and should cause you to question your resolve on some of your positions that you have given less thought to. At this point I think the prudent thing to do is take half of the position off in front of the event, because if you are wrong you will see all of the premium go away and quick.
ORIGINAL POST MAY 31, 2011:
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