Trade Update NKE – Taking My Gains on The Put Calendar

by Enis September 28, 2012 11:01 am • Commentary

Trade Update Sept. 28th, 2012 at 11:00 am:  Given that the news is out on NKE, I’m going to take the gains and move on from this trade.  With the Oct / Nov calendar, it is going to take a lot of time for me to realize further gains from here.  This is still a 6 delta position, meaning its value is much more reliant on moves in volatility rather than moves in NKE stock.  I’d rather take what I made on the implied vol move this morning, and look for other single name opportunities instead.

Action: Sell NKE ($94.35) Oct / Nov 90 Put Calendar to close at 0.86, for a gain of 0.20


 Original Post Sept 26th, 2012:  Q3 NKE Preview

The Olympics, the European Football Championship, and a Lebron James-led NBA championship should normally constitute a banner year for NKE, the sports advertising king.  But the Goddess of Sport is actually one of the few companies in the SPX top 100 that is down on the year.

Sales figures this year would likely have been down year over year in Europe if it were not for the European Cup and Olympics both being held in the region.   Meanwhile, Chinese orders are estimated to be close to flat in the second half of 2012, 10-15% yoy growth in the first half.  The U.S. market has been NKE’s saving grace, still growing in double digits for most of the year.  Now that international growth seems tepid, the bulls’ argument has shifted to the new NFL jersey deal, and the potential for new enthusiasm in emerging markets ex-China.

But the salient point for me ahead of today’s earnings is the company’s own announced buyback last week.  The longer term trends point lower for NKE, but last week’s 8 billion buyback announcement from management seemed to be a life vest thrown to a swimmer in rough seas.  Management might just think they need a few more buyers of the stock given the operating trends they’re observing.  

Having said all of that, expectations for this earnings report seem low.  I don’t want to walk in tomorrow with earnings and guidance inline, and the stock up at $100.  So I’m going to do a lower risk, lower reward strategy, with an eye to adjusting my structure after the vol crush tomorrow.

TRADE: NKE ($95.05) Bought the Oct / Nov 90 put calendar for $0.66
  • Sold 1 Oct 90 put at 1.70
  • Bought 1 Nov 90 put for 2.36



I think NKE is likely to move lower over the next few months.  But NKE realized vol has been below 20 for most of the past 2 months.  So I want to participate in the earnings move, but without being exposed too much to the vol crush.  The Oct / Nov calendar gives me that exposure.  It also gives me the flexibility to potentially buy back my Oct and sell a lower strike Nov put at some point in the next few weeks.  Why not just buy a Nov put spread today?  There are fewer winning scenarios for me tomorrow, and less flexibility going forward.


Q3 NKE Preview from Sept 26th:

Event: NKE reports Q3 earnings Thursday morning after the close. The options market is implying about a 5% move, which is right in line with the 4 quarter avg of 5%, and slightly below the 8 quarter average of 6%

Sentiment: Wall Street analysts are somewhat bullish on the name, with 10 buys, 13 holds, and no sells.

Fundamentals: NKE announced a $8 billion buy back last week, a week before its earnings announcement.  Traders didn’t seem to take it as very good news either, as the stock ended unchanged that day, and has been down each day since.  NKE gets only 35% of its revenues from North America, and international weakness especially hurt results in the May quarter.  Based on Asian and European data since then, NKE seems poised to disappoint for the second straight quarter.

Valuation:  NKE trades on a 18 forward P/E, sports a 1.5% annual dividend yield, and has projected sales growth of 8% and earnings growth of 14% for next year’s consensus estimates.  Its P/E is near the high end of its 5 year range, despite the fact that expected earnings and sales growth over the next year is near the low end:


5 year NKE P/E ratio chart courtesy of Bloomberg

Most interesting from a fundamental standpoint is that NKE’s gross margins (in the low 40s) are near 5 year lows as well.  NKE is one of the few large American multinationals who is not operating near peak margins.

Technicals:  NKE clearly broke its 3 year uptrend with its steep selloff after the June earnings report.  NKE is down about 1% YTD in 2012, significantly underperforming the broader market.

The 5 year weekly chart shows the break below the long term trendline:


5 year NKE stock chart courtesy of Bloomberg


The stock tried to regain the trend on the recent rally.  The $100 level is clear resistance, with support coming in around the June lows of $85 after earnings.

Volatility: NKE has weekly options with vol priced in the 80′s but the regular months are in the 20′s and 30′s with October 35 vol, and Nov 28 vol. Historically, vol across all months is pretty high, with IV above the average earnings cycle. It probably ticks a little higher in the next day. The actual vol in the stock is far lower than options are trading, that could change obviously on a big move down after earnings, but in general actual vol and implied vol tend to be in the mid to high 20′s over time. Although, following earnings they collapse, so expect Nov and out month vols to see the low 20′s following the report.


My View: NKE has been a weakling in a very strong year for stocks.  There are many examples of stocks that reported weak Q2 results, but have since ridden the central bank wave higher no matter the fundamentals.  NKE’s inability to participate in that rally throughout the year is a cause for serious concern.  Dan mentioned the cheapness of October implied volatility in his Name That Trade post from almost 2 weeks ago.  Since then, implied volatility has become more elevated, making front month bets less attractive on a risk/reward basis.

I am likely to execute a new trade on NKE ahead of earnings tomorrow, but I plan on moving further out in expiries given the move in implied volatility into the earnings report.