New Trade Nike (NKE): Just Short It?

by Dan March 9, 2012 3:11 pm • Commentary

Here is a quick preview of what I will be discussing on Options Action tonight on CNBC at 5pm:

NKE $110

Stock is up 14% ytd, outperforming the SPX which is up about 9% ytd, things seem to be firing on all cylinders for the athletic footwear and apparel maker.  There are plenty of near term catalysts to buoy sales such as European Soccer Championships, Olympics, NFL Jersey deal.  The current valuation may reflect some best case scenario at about 20x 2012 earnings at the high end of the 5 yr range.

Chart below shows the almost lock step performance over the past 12 months of NKE with another U.S. multi national until this week’s break-out of NKE and break-down of MCD.


1 yr NKE vs MCD from Bloomberg


Little Fun Fact: In  a note to clients last month, Morgan Stanley noted that NKE has Outperformed in 86% of all Summer Olympic Years and 77% Overall.


MY VIEW: The market is paying little attention to MCD’s same store sales miss, largely the result of weak sales in Europe and Asia….. Obviously I cant think of single reason why anyone would want to be naked short NKE but stock replacement could make sense for longs as they head into the company’s fiscal Q3 report March 22nd.   Last year when the company reported their fiscal Q3 they missed for the first time in 5 years and the stock went down almost 10%.  The miss was largely the result of lower margins due to higher input costs…..Cotton was largely the culprit, which is trading much lower now, but crude oil is right back above $100 a barrel where it was last year at this time.

If there are any take-aways from MCD’s recent commentary is that bad things can happen to good companies who are performing well.  NKE gets only about 40% of their sales from North America, and as China growth slowdown became a hot topic this week, could we start to see companies like NKE note a sign of caution about emerging market sales in the near term, a place where a good bit of their growth is expected to come for the better part of the rest of the decade?

As a trader without a long position in the stock, I looked to make a defined risk bearish bet and buy a tight put spread as the stock continues to make new highs seemingly every day.

I bought this spread for what will likely amount to a 1/4 position and depending upon price action prior to earnings I will look to add:


NKE $110 Buy Apr 105/100 Put Spread for .90

-Buy 1 Apr 105 Put for 1.80

-Sell 1 Apr 100 Put at .90

Break-Even on Apr Expiration:

Profits btwn 104.10 and 100, make up to 4.10, max gain of 4.10 at 100 or below. Break even down 5%

Losses of up to .90 btwn 104.10 and 105, with max loss of .90 above 105.