Name That Trade – $NKE Go Swoosh?

by Enis September 25, 2014 12:57 pm • Commentary

NKE reports its earnings after the close, and the stock sits just below the crucial $80 breakout level as I type.  In fact, that stock has moved below $80 for the first time since the early September breakout to a new all-time high:

NKE daily chart, courtesy of Bloomberg
NKE daily chart, courtesy of Bloomberg

The $80 level is a critical spot for NKE, as has been obvious from the price action of the past year.  Today’s earnings report is likely to be the catalyst to either confirm the breakout, or lead to a failed breakout and possibly a move back to the lower end of the $70 to $80 range that was in play for most of the past year.

Here are the details for today’s earnings event:

Implied Move:  The options market is implying about a 4% one day move, which is above the four-quarter average of about 3% but in line with the eight-quarter average of about 4%.

Sentiment: Wall Street analysts are positive on the stock, with 20 Buys, 11 Holds and no Sells, with an average 12-month price target of around $87.  NKE is up 2% year-to-date.  Short interest is negligible at 1.2% of the float.

We had a small winner in NKE earlier this month, though the trade structure prevented a bigger win from the stock’s breakout above the $80 level.  In any case, our general idea that the $80 level was likely to act as a magnet prior to earnings has proven correct.

NKE has lagged the broader market in 2014, as its valuation has likely become a hindrance to attracting new money into the stock.  The trailing 12 month P/E has been around a 10 year high for much of the past year:

NKE trailing 12 month p/e, courtesy of Bloomberg
NKE trailing 12 month p/e, courtesy of Bloomberg

At this elevated valuation, NKE has to maintain very strong results for the stock to continue to move higher.  Granted, analysts are expected about 15% EPS growth over the next 2 years, but that could also be viewed as an awfully high bar for NKE in an environment were the dollar is rallying and international economic growth could be stagnating.

We don’t have a strong directional view on NKE, but here are a couple ideas depending on your bias:  

1)  Protection for NKE longs or trade for speculative shorts

-Buy the November 77.50 / 70 Put Spread for $1.35

This trade structure offers protection in NKE between $76.15 and $70, while only risking $1.35.  It offers protection out to November, which is about 2 months, so the trade structure will not be as impacted by the vol crush after earnings as shorter-dated structures.  It risks 1.75% to make about 9%, which is a pretty good risk/reward in NKE.  The trade targets the $70 support level on the downside.

2)  Alternative to a long stock position or trade for speculative longs

-Buy the Oct3rd 80 call for $1.60

This is a simple trade, but it’s mainly based on the thought that NKE’s move over the next week is likely either going to be a breakout to new highs or a breakdown from a failed breakout.  If you agree, then owning next week’s 80 strike call is a lower risk way to participate in a potential breakout, while capping your downside to 2%.  The main downside vs. owning long stock was if NKE ends up near unchanged over the next 6 trading days.