Whether you’re a bull or bear on the broad market, you have to agree that Home Depot’s technical breakout above the prior all time highs is nothing short of a work of art:
For all intents and purposes, HD had traded between $74 and $84 for the past year, a period in which the S&P 500 has appreciated a little more than 20%. HD had under-performed, until today’s 6% gap.
We have spent a good bit of time on the site over the last few weeks identifying some broad market divergences, particularly the breadth of the rally, but seeing stocks like HD play catch up and breakout to new all time highs, on big volume is notable for a $120 billion market cap company.
With most major equity indices in the U.S. back at or about to make new 52 week highs, it makes sense to look for similar set ups for other large cap laggards.
Back in late June, I took a look at Nike (NKE) following their fiscal Q4 results (Nike Fueled for Breakout?) and concluded:
until we see an acceleration in organic earnings growth, the stock in the high $70s remains expensive at 22.5x current fiscal 2015 estimates, which were not raised on last night’s call. Obviously the improvement in EM, and the strong futures are encouraging, but currency headwinds and higher input costs may offset some of this improvement.
Is the stock setting up for an epic breakout above the previous highs? Maybe, but I am not sure that last night’s results are the proper catalyst. I would now move up my low $70s entry point on the long side to the mid $70s, as I would only be interested to play for a technical breakout after a greater period of consolidation.
Well here we are almost 2 months later, and the next identifiable catalyst will be their fiscal Q1 earnings. They should fall in the last week of September and should see some of the positive effects of the World Cup that fell in the quarter. The stock is essentially in the same spot it was following their last report, holding its 200 day moving average (yellow below) the whole time:
So what’s the trade?
Since the next earnings report is after Sept expiration, it makes sense to play for a breakout by selling the strike at the previous high before then to finance owning the same strike in the expiration that catches earnings:
TRADE – NKE ($78.60) Buy to open the Sept/Oct 80 call calendar for 1.00
– Sell 1 Sept 80 call at .65
– Buy 1 Oct 80 call for 1.65
Breakeven on Sept expiration: Losses with large moves below or above $80 with max gains at $80. Ideally the Sept calls expire worthless and the Oct calls can then be spread within the same month.
Rationale: The stock looks poised for new highs but may run out of some steam in the near term with no catalyst in Sept expiration. The calendar plays for that while owning the call for the October expiration that catches earnings.
I would add one more point, 30 day at the money implied vol is at new 52 week lows, and options appear very cheap, but given we are in the final weeks of summer which will be capped by a long holiday weekend in early September, it makes sense to finance long premium directional bets:
[caption id="attachment_44444" align="aligncenter" width="600"]
Nike 30 day at the money IV from Bloomberg[/caption]