A few weeks ago we expressed a near term bullish view for shares of Nike (NKE) in the form of a call butterfly, to refresh from April 7th:
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
The intent at the time time was to play for a re-test of the post earnings high. The stock has since flat-lined in and around $100, and the stock’s inability to catch a bid, coupled with the weakness of Under Armour and Lululemon of late could reflect a brand new skepticism among investors for high priced consumer discretionary stocks. That being said the base here at $100 looks just fine, barring broad market sell off, but time is not going to be my friend for this trade as the value of my short leg has diminished dramatically (which was the intent) and now I am essentially just long an in the money call that will also start to lose much of its extrinsic value as we get closer to May expiration in two weeks. At this point I can’t identify a catalyst as to why the stock should rally, and I am going to close rather to play a waiting game as the trade has worse odds than a coin flip.
Action: Sell to Close NKE ($100.70) May 100/105 1×2 call spread at 1.35 for a 5 cent gain*
* I am not going to sell the May 110 calls as they would be sold for a penny and frankly commissions would cost more to do so, and it is essentially a lotto ticket keeping it as a long.
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Original Post April 7th 2015: New Trade – $NKE With Wings?
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:
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:
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:
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.