Nike (NKE) – Blame it on Rio

by Dan August 5, 2016 11:45 am • Trade Ideas

Prior to Nike’s (NKE) fiscal Q4 earnings report in late June, the stock was trading at 2016 lows, which was down almost 25% from its 52 week and all time highs made in late December 2015.  While sales and futures orders were better than expected, specifically in important growth markets like China, their 55% revenue exposure outside the U.S., coupled with the recent bid in the U.S. dollar continues to be a headwind.

As the broad market broke out to new highs in July, shares of NKE caught a bid, but have since retraced nearly all of July’s gains, and the stock is now right above technical support at $55:

from Bloomberg
from Bloomberg

Short dated options prices in NKE are are 2016 lows, as 30 day at the money implied volatility does not account for NKE’s fiscal Q1 earnings that should fall the week after Sept expiration:

From Bloomberg
From Bloomberg

For those who might be inclined to make a directional bet into the summer Olympics where NKE’s athletes will be prominently displayed, you might think twice about straight long premium strategies as we head into the summer doldrums.

If you were inclined to play for a catch up trade in NKE, as the S&P 500 continues to power to new highs, and as sentiment toward’s a laggard like NKE might improve around the Olympics and into the start of the NFL, you might want to consider financing long calls by selling out of the money puts near the recent lows.

So what’s the trade?

NKE ($55.65) Buy the Sept 16th 52.50 / 57.50 Risk Reversal for 15 cents

-Sell to open 1 Sept 52.50 put at 40 cents

-Buy to open 1 Sept 57.50 calls for 55 cents

Break-Even on Sept Expiration:

Profits: above 57.65 (call strike plus premium outlay)

Losses: of 15 cents between 57.50 and 52.50, worst case put 100 shares of stock at 52.50, down 5.5% from current levels.

Rationale: the highest probability outcome on Sept expiration is a loss of the 15 cents premium, but for those looking to have some upside long exposure this trade has about 50 deltas (30 to the calls and 20 to the puts), so the position should move by about 50 cents in the near term for every dollar move in the stock.  This will decline as we get closer to Sept expiration, making both options less sensitive to small moves in and around current levels.

I’d consider this trade as mildly bullish, meaning it slightly lacks conviction given the out of the money nature of the calls, but the bullish stance is reinforced by the put sale.  This is trade structure would be done for someone who is willing to take near term market risk of a sell off which would be the likely reason for the stock to be at or below the put strike on Sept expiration as fundamental news relating to the stock will likely not come  until the earnings report in late Sept.