4th Trade Update NKE: Closed 2nd Half July 97.50 / 92.50 Put Spread for more than 3x What I Paid

by Dan June 29, 2012 9:40 am • Commentary

4th Trade Update June 29th, 2012 at 9:40am:  This was the trade that kept on giving….after getting knocked down from all time highs in May, NKE kept making new lows, under-performing the broad market, the very market that it had helped power to new multi-year highs the month prior.

When everyone was looking up, we were looking down as we felt the stock was priced to perfection and the signs of slowing growth in Asia, and the increasingly obvious recessionary environment in Europe could easily cause an earnings disappointment.

Well there you have it, and the stock is down about 10% this morning, on a very rare earnings miss by the footwear and apparel maker.

With the stock down this morning and nearing levels (~$85) that should see buyers step in, I am going to close the second half of this position for more than 3x what I paid.

ACTION: NKE sold 2nd half July 97.50/92.50 Put Spread  at 4.50 for a ~$3.30 profit (stock ref 86.60)

I am going to take these profits and look to role them into another short of a high end seller of discretionary goods that has yet to sell off, or not sold off enough…..




3rd Trade Update June 28th, 2012 at  2:49pm: NKE reports thier fiscal Q4 earnings tonight after the bell, the options market is implying about a 4.5% move vs the 4 qtr avg move of about 5.4%

With the stock down about 5% from the time I put the trade on June 15th, and with tonight’s earnings event likely to move the stock one way or the other in a meaningful way, I am going to take half of my original position off for nearly a double.  This way I ensure that I can’t lose on the trade, and have actually locked in some gains as a result of my trading last week (see below).

While I haven’t changed my tune on U.S. multinationals with large overseas exposure, I would rather now focus on names like GE that trade near recent highs as opposed to names like NKE that are now off about 16.5% from the recent highs.


ACTION: NKE sold half July 97.50/92.50 Put Spread  at 2.17 for a ~$1 profit (stock ref 96.25)


As I said the other day in the MorningWord, you will never go broke taking profits, and that is what I am doing here, while leaving some chips on the table to make it interesting!





2nd Trade Update June 21st, 2012 at 3:55pm: Closed the half of the July 97.50/92.50 Put Spread I bought yesterday for 1.00 at 1.60 just now (stock ref 98.60).  I have taken off the added risk from yesterday and lowered my cost basis on the initial position.

Similar to my IBM maneuvering, I averaged in yesterday while the market and the stock was against me, and using today’s weakness to take some risk off of the table.

ACTION: NKE sold half July 97.50/92.50 Put Spread  at 1.60 (stock ref 98.60)  this was the portion that I bought yesterday at $1.00


Trade Update June 20th, 2012 at 1:55pm:  When I initiated a partial position in the July 97.50/92.50 Put Spread on Friday, I stated that I would add to the position on any strength.  Well the SPX is up 1.7% since Friday mid-day and NKE does not participate, the stock trades very heavy and under-performs the SPX by about 1% in that same time period.

With the stock at 101.45, I want to add to the position, paying 1.00 giving me a new average of about 1.175 for the $5 wide Put Spread.  I will keep a close eye on thus position as the company reports fiscal Q4 on June 28th.

ACTION: NKE bought July 97.50/92.50 Put Spread  for 1.00 (stock ref 101.50) resulting in a new average of 1.175


Original Post June 15th, 2012 at 12:09pm:  New Trade NKE: Just Press It

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

NKE has been one of those teflon stocks over the past 12 months, rallying from its lows in Aug 2011 to its recent peak last month of almost 50% without a meaningful pause.  The stock displayed all of the characteristics that investors looking for a reflation of global growth get giddy about as more than 50% of their sales, and most of their expected future growth come from overseas.  

To state the obvious, NKE has had a bad week, down about 7%, largely the result of a research call from a firm that most readers have never heard of.  On June 13th, OTR Global issued the following cautious report on NKE:

Slowing China Trends Tug at NikeNike’s athletic shoe order growth rate dropped in China, eased slightly in the United States and remained steady in Western Europe during March–May yy, and U.S. buyers have low expectations for Nike’s new Flyknit style.

• OTR Global’s read on NKE is mixed, a deterioration from positive in the March report
• In China, NKE’s athletic shoe orders for next six months flat yy, vs. up 10%–14% in March, as demand for athletic shoes and sportswear continues to decline; NKE shoe-to-stock ratio improves since March, but at the cost of margins

• U.S. NKE athletic shoe orders for next six months up 9%–13% yy, vs. up 15%–19% in March,with sources still positive on athletic cycle; family channel capitalizing on increased light weight looks from Nike

• Western European NKE athletic shoe orders for next six months up 1%–5% yy, as in March, held up by the European Football Championship and London Olympics
• NKE apparel trends a struggle in China, even more than athletic shoes; apparel trends deteriorated in Western Europe, hurt by bad weather and lack of innovation; U.S. apparel trends remain positive

• Area to Watch: U.S. buyers not impressed by Flyknit offerings and think demand will be lower than NKE projected

We don’t have a ton to add on the fundamentals, but if in fact the trends noted above are weakening, and this is confirmed on the company’s fiscal Q4 earnings report on June 28th, the stock is likely to continue to suffer.

Our Technical View:

NKE’s price action in the last 3 months is a textbook example of distribution taking over after a strong uptrend.  While the  stock basically stalled out between 100 and 110, the volume indicated increasing aggressiveness by sellers on each down move, as the 2 largest volume days in the past 6 months were on  the first test of the 50 day ma in March, and then the test of  the 200 day ma on this week’s selling.

In addition, the momentum of the stock as measured by the RSI has been steadily trending lower in the past 3 months, indicating a new downtrend after a long prior uptrend.  The 100 level is important support for now, and any convincing break should see the stock at 95 in short order

[caption id="attachment_13245" align="aligncenter" width="515" caption="NKE 1 Yr Chart from Bloomberg"][/caption]


NEAR TERM the stock is obviously a bit oversold, but apparently teetering right at huge support level at its 200 day moving average at about $100.

We would much rather lay this one out on any rally, but we are going to initiate a qtr size position at current levels, and look to add on any strength, the chart is broken, and if the fundamentals confirm the technical picture we could see this stock unchanged on the year in short order.


TRADE: NKE ($100.93) Bought the July 97.50 / 92.50 Put Spread for 1.25
  • Bought 1 July 97.50 Put for 2.62
  • Sold 1 July 92.50 Put at 1.37

Break-Even on July Expiration:

  • Profits btwn 96.25 and 92.50, make up to 3.75, with max gain of 3.75 below 92.50 down about 8.4%
  • Losses of up to 1.25 btwn 96.25 and 97.50, with max loss of 1.25 above 97.50.


TRADE RATIONALE:  We think things are going to “hell in a hand-basket” this summer, we think that names both exposed to U.S. consumer, and those relying on ex-U.S. for growth will have particular weakness.  We think there is a definite possibility of a short covering rally in the weeks to come, but we are initiating small short positions with defined risk in what we deem to be crowded trades.  This will be a name that we will add to the short on any rally.