Yesterday, Dan previewed Nike (NKE) fiscal Q3 earnings due after the bell today and highlighted a large trade that went up in the options market. To recap, here was that large trade:
When the stock was $64.50 at 11am, a trader bought the March 24th weekly (this Friday) 65 / 67.50 1×2 call spread paying 27 cents to open 3800 by 7600. I suspect this is a leverage trade against a long stock position of 380,000 shares. Think of it as a leveraged overwrite, where the investor is buying a 65 / 67.50 call spread, but also overwriting their existing stock position by selling an additional 67.50 call. The investor has gains of the stock up until 67.50, where stock would be called away, but if stock were 67.50 or higher the investor would make the difference between the width of the spread and the premium paid for the ratio call spread.
The 1×2 is a great strategy against a long into an event for those wanting to leverage but willing to sell (get called away) on a decent move higher. We detailed a similar trade in ORCL last week into its earnings.
We wanted to look into some strategies into the print in NKE for those that are already long and for those that want to position without an existing holding.
First, let’s look again at the move being implied by the options market. Right now the March 24th options are implying a $3.85 move in either direction by this Friday’s expiration, so with only a few days until expiration, that’s basically telling you the risk of the event move:
So on the chart that puts the implied move in NKE at either its all time high made in December (when it split, 68ish) or down near (but just above) its converging 50 and 200 day moving averages (60ish). So those are important levels that inform option strike choices. That level above certainly informed the choice of strikes in the large trade detailed above as the trader is likely looking to leverage a move back towards those highs but not too far above or through. The likelihood of the stock facing resistance at those highs makes that a really nice overlay choice versus a long.
We can use similar thinking to target a move to those highs based on no previous positioning but for those looking to own NKE for a move to those highs and the potential for a breakout after:
Buy the NKE (64.75) March 24th/ May 67.50 call calendar for 1.00
- Sell 1 March 24th (weekly) 67.50 call at .77
- Buy 1 May 67.50 call for 1.77
Rationale – This trade does best on a move higher in NKE to 67.50 (near the highs) but looks to capture the short premium of the weekly 67.50 call with the hope that the stock faces resistance at those levels this week. If that is indeed the case the March short call can be closed and rolled out to either April or May where it becomes an even cheaper calendar (in the case of a April sale) or a cheap upside call spread vertical (in the case of a roll to a higher strike call sale in May vs the May 67.50 long) The risk on this trade is two fold, obviously if the stock goes lower this becomes a loser as it’s long deltas and bullish, but it also can become a loser with a large gap higher through the previous highs. So this is for those bullish but not looking for upside fireworks in the near term. The implied vol being bought in May is about 27 which is high historically and will likely come in to the low 20’s. So that is a concern, but the 95 vol being sold in the weeklies will help as long as the move in the stock is slightly higher or inline with the implied move and not down or explosively higher. If the stock goes nowhere it’s possible that May vol crush could cost the overall position a little bit of a loss but the position will still be fine if the stock moved higher after this week.
So that’s looking up, what about looking down to that level of support of the converging 50 and 200 day moving averages?
NKE (64.75) Buy the March24th (weekly) 65/60/55 put fly for 1.30
- Buy 1 March24th 65 put for 1.95
- Sell 2 March24th 60 puts at .35 (70 cents total)
- Buy 1 March24th 55 put for .05
Rationale – Vol is pumped going into earnings so low cost premium paid for protection is tough to find. In this case the strategy tries to raise that breakeven for protection (or outright bearish) by doing a slightly in the money put fly rather than an out of the money put spread. The breakeven on this fly is at 63.70, about a dollar lower that where the stock is now. That protection maxes out at $60 in the stock below where the fly will have made 3.70. Below that profits begin to trail off and on a massive move lower (below 56.30) this trade could actually become a loser. So like the call calendar detailed above, this is looking for a move inline with the implied move, but not out out-sized move lower. This is not a lotto ticket for a collapse in shares. The risk in the other direction is obvious as a move higher means this could be worthless. And a sideways move where the stock goes nowhere risks losing the entire amount as any close above 63.70 on Friday means this is worthless.