Trade Update – $NKE: Closing Call Calendar for Small Gain

by Dan September 9, 2014 10:49 am • Commentary

Back on Aug 19th we highlighted the potential for NKE to follow suit with some other large cap stocks that had recently broken out of long bases to new all time highs (see below).   At the time we chose to buy a call calendar to help finance the purchase of upside calls, targeting a breakout after Sept expiration.  Well, we got the direction right but the timing and trade management wrong as late last week the stock broke out to new all time highs, above our strike at $80.  Heading into this afternoon’s Apple iPhone launch event and possible wearable with some sort of sport functionality, investors could be optimistic about ta broader collaboration with Nike.  While this would not likely move the needle anytime soon for NKE, it could be positive for sentiment.

There is nothing more than I hate as a trader getting the thesis and direction right, but the trade structure wrong. The only thing that I like less is losing money, so the call calendar that we bought back in August is now break-even to what we paid, so I am going to close it for a wash, and look to re-evaluate the bullish thesis:

Action: NKE ($81.70) Sell to Close Sept/Oct 80 Call Spread at 1.10

– bought to close 1 Sept 80 call for 2.05

– sold to close 1 Oct 80 call at 3.15


Original Post Aug 19th, 2014:  New Trade – $NKE Air

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:

HD 1yr chart from Bloomberg
HD 1yr chart from Bloomberg

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:

NIKE 1yr chart from Bloomberg
NIKE 1yr chart from Bloomberg

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:

Nike 30 day at the money IV from Bloomberg
Nike 30 day at the money IV from Bloomberg