Name That Trade – $NKE: Air Max?

by Dan March 12, 2015 2:41 pm • Commentary

Nike (NKE) is scheduled to report their fiscal Q3 results a week from today after the close.  The options market is implying about a 4% one day move which is shy of the 5% average over the last four quarters.

On Tuesday I highlighted some bullish options activity in NKE:

When the stock was 96.85 a trader sold 14,000 March 95 puts to open at 1.15.  If the stock is above 95 on next Friday’s close then the trader will receive the 1.15, or $1.6 million in premium.  The put sale obligates the trader to buy the stock at 95, but less the 1.15 premium received, so 93.85, down about 3%

Today the largest trade on the day was a bearish trade:

when NKE was 95.64 a trader paid 15 cents for the April 10th weekly 94.50 / 91 1×2 (2800 by 5600) put spread to open.  This trade breaks-even at 94.35 on the downside, with gains up to 3.35 between 94.35 and 87.65 with the max gain of 3.35 at 91, down about 5%

So the largest flow this week has told fairly different stories but between the two trades, the opening put sale appears to be a bit more convicted given how close it is to the money and the fact that it specifically targets next week’s earnings event.

A quick perusal of the 1 year chart shows that the stock has spent the better part of the last 5 months between $90 and $100:

NKE 1yr chart from Bloomberg
NKE 1yr chart from Bloomberg

While NKE is clearly a premium brand, with expected double digit earnings and sales growth in the current fiscal year, the stock’s valuation reflects that already with its trailing P/E nearing all time highs (excluding 1999/2000):

NKE 12 month trailing P/E from Bloomberg
NKE 12 month trailing P/E from Bloomberg

Back in mid December when NKE reported their fiscal Q2 results, the company said that orders for the period just ended would be slightly below current estimates as Western Europe and emerging continue to be challenged.  NKE gets a little more than half their sales from overseas. Continued weakness outside the U.S. coupled with the strength of the dollar could keep forward guidance under wraps.

We’ll check back in before the event with some ideas for stock replacement which makes sense so close to the highs. We’ll also see if the options set up for some other views to be expressed.