Nike (NKE) Update – Rio Bravo

by Dan August 19, 2016 1:06 pm • Trade Ideas

Two weeks ago we looked at Nike (NKE) stock and thought that it offered good risk reward for those looking for a catch-up trade, especially given the international exposure that comes from Olympic Games time. Here was the trade idea we detailed:

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

Nike is higher today by about 3% on a string of good news including a supply chain investment by private equity firm Apollo and good results from Foot Locker (FL).

Let’s check in on this trade structure and what can be done to manage. With the stock $59, the overall trade is worth about 1.90 versus the .15 original cost basis. Of course, being short a put requires margin and with the stock now nearly $3 higher those 52.5 puts can be closed for .05. That is the right thing to do here. Obviously the entire trade can be closed for a nice profit. But what about those wishing to stay in the name and reduce some risk?

The Sept 57.50 call is now worth nearly 2 dollars and is in the money by about 1.50. But the stock is approaching its 200 day moving average (59.50) which could act as a little resistance (200 day mva in blue):

Screen Shot 2016-08-19 at 10.50.22 AM
6 month NKE from LiveVol Pro

So for those that want to stay in the name, there’s two options here…

The first is to close the put and then turn the Sept 57.5 call into a straight vertical. Right now the Sept 62.5 calls are just 10c so they’re not worth selling. The Sept 60s have a little meat on them and can be sold for about 0.55. That turns the trade into a credit (.35), so nothing can be lost from here on out and it has the potential of being worth 2.50 (plus the .35 credit making it 2.85). But there’s maybe a smarter way to do this, and that is to turn it into a vertical call calendar, taking advantage of the Sept 2nd expiration right before Labor Day weekend. If you sold the Sept 2nd 60 call at about .30 it creates a vertical similar to the straight Sept 57.5/60 call spread, but with the added benefit of the possibility that the Sept 60 call expires worthless, leaving 2 weeks more for the Sept 57.50 call to ride and the added possibility of rolling it once more. In that situation you’d want NKE to stay here or get up to 60 into Labor Day, and have that short call expire worthless.

Of course, selling either of those calls doesn’t lock in the profits so far, it simply takes off all the risk of losing anything, while leaving for more profitability.