New Trade – $NKE With Wings?

by Dan April 7, 2015 11:55 am • Commentary

Back on March 19th shares of NKE gapped to a new all time high following fiscal Q3 results that were better than expected, despite no shortage of headwinds from the strength of the dollar, bad weather in the U.S., West Coast port delays, weakness in emerging markets like China and difficult comparisons from the ramp up into the World Cup last spring.  While some of these challenges have certainly abated, the strength of the dollar has caused analysts (per the company’s guidance) to model the lowest annual sales growth in years.

The initial enthusiasm has worn off since the March 19th nearly 4% gain, and the stock has since filled in the earnings gap, back to the breakout level:  

[caption id="attachment_52532" align="aligncenter" width="600"]NKE 1yr chart from Bloomberg NKE 1yr chart from Bloomberg[/caption]

In March the stock traded in nearly a 10% range between $95 at the lows and close to $104 at the highs, and now has settled in at the mid point.  Since earnings options prices have come in hard, with 30 day at the money implied vol having recently tested 52 week lows:

[caption id="attachment_52533" align="aligncenter" width="600"]NKE 1yr chart of 30 day at the money Implied Vol from Bloomberg NKE 1yr chart of 30 day at the money Implied Vol from Bloomberg[/caption]

While few analysts changed their ratings on NKE at new all time highs after the results, there were plenty who expressed caution on the risk/reward, largely due to valuation, as the stock now trades at 28x expected fiscal 2016 eps growth of only 12%.  NKE’s forward P/E is at a 15yr high, nearing levels not seen since the late 1990s:

[caption id="attachment_52534" align="aligncenter" width="600"]NKE 20 yr forward P/E from Bloomberg NKE 20 yr forward P/E from Bloomberg[/caption]

Over the last couple weeks we have highlighted stocks, like NKE, which had broken out on strong results, filled in the gap lower, but looked poised to re-test the highs (ADBE – here, CRM- here, & KRFT – here).  NKE could be setting up for a move back to $105 in the coming weeks if the S&P 500 is going to breakout to new highs.

TRADE – NKE ($100) Buy the May 100/105/110 call fly for 1.30

– Buy 1 May 100 call for 2.30

– Sell 2 May 105 calls at .55 each (1.10 total)

– Buy 1 May 110 call for .10

Breakevens on May Expiration:

Profits: of up to 3.70 between 101.30 and 108.70, with max gain of 3.70 at 105

Losses: of up to 1.30 between 100 & 101.30 and between 108.70 and 110 with max loss of 1.30 below 100 or above 110.

Rationale – This is a trade that looks to target recent break-out highs around $105 over the next month and change. It also works as a great stock alternative or replacement of shares following the recent gap fill lower from those highs. Profits start to trail off above $105 but that sort of move seems unlikely on any sort of gap higher with no major events scheduled in the time frame.