Nike (NKE) – Just Define It

by riskreversal December 20, 2016 1:05 pm • Trade Ideas

Event: Nike (NKE) reports fiscal Q2 results tonight after the close. The options market is implying about a 4.5% one day post earnings move. With the stock at $51.50, the Dec23rd weekly 51.50 strangle (the call premium + the put premium) is offered at about $2.40, if you bought that, and thus the implied weekly move you would need a rally above $53.90, or a decline below $49.10 to make money. The average one day post earnings move over the last 4 quarters has been about 3.5%, which is basically inline with the average one day post earnings move over the last 10 years of 4.8%.

Price Action / Technicals: NKE has been a standout under-performer in 2016, down about 17% ytd and down 24% from its all time highs made in late December 2015 following the post Q2 earnings gap.

To my eye, shares of NKE are doing their best to hold above technical support dating back to late 2014, at the nice round number of $50:

NKE since 2014 from Bloomberg

If the stock were able to rally post results a retest if the one year downtrend from the highs could be in place back towards $55.

Taking a longer term view, and depending on how you draw the lines, the stock has broken the long term uptrend from late 2012 on two occasions this year, and the continued under-performance could give way to air-pocket below support at $50 to the low $40s:

NKE 5yr chart from Bloomberg

My View into the Print: Shares of NKE trade about 22x expected f2017 eps growth of 9%, which would be its first single digit annual eps growth print since 2012, on 7% sales growth. While that multiple is expensive to market, it is cheap to its history and to peers like Under Armour (UA).  Investor sentiment is obviously very poor made evident by the stock’s under-performance, despite Wall Street analysts being fairly mixed on the stock with 22 Buys, 14 Holds and 1 Sell rating.

Also weighing on the stock is the company’s revenue exposure outside the U.S., about 60%, where they expect to get much of their future growth. The U.S. dollar’s rally of 8% since the company last guided on Sept 27th is certainly going to weigh on forward guidance.  Oh, and if the tough talk on trade by the President-Elect carries over after inauguration, it would certainly have and adverse affect on U.S. companies like NKE.

I am hard-pressed to short NKE playing for the big break, especially when you consider the recent rallies in prior market leaders Apple and Disney, it feels like investors are looking for a reason to buy high quality laggards, but if the stock does disappoint, a move below 50 looks almost certain.

So what’s the trade?

My co-panelists on CNBC’s Options Action on Friday, Carter Worth and Mike Khouw laid out a bearish technical outlook for the stock and fundamental outlook for the company (respectively) and detailed a defined risk bearish trade in the stock:

If you agree with their take into the print, Mike’s trade idea targets, with defined risk a break of $50 down towards $47.50 by Jan expiration, on Friday’s close of $50.92, buying the Jan 50/47.50 put spread for 65 cents. This trade breaks-even at $49.35, down 3%, and offering a max payout of up to $1.85 down to $47.50, down about 6.7% from the trading level:

That makes sense for those outright bearish, looking for a breakdown, or even those long the stock looking for protection. But we might consider widening out the put spread and possibly giving it a bit more time as we expect some downside volatility in early 2017. With the stock at $51.50 as I write, the Feb 50/42.50 put spread is offered at $1.15, breaks-even on the downside at $48.85 offering a max payout of up to $6.35 between $48.85 and $42.50 on Feb expiration.


But for those looking to catch the stock for a move higher, similar to what we’ve seen in AAPL and Disney, a defined risk long is the way to limit any potential damage on a break below 50, while offering similar returns to stock on a move higher.

Defined Risk Stock Alternative

in lieu of 100 shares of NKE (51.40) Buy the Dec30th 51/56 call spread for 1.45
  • buy 1 Dec30th 51 call for 1.60
  • sell 1 Dec30th 56 call at .15

Break-even on Jan expiration – losses of up to 1.45 below 52.45 with total loss of 1.45 below 51. Gains of up to 3.55 between 52.45 and 61 with max gain at 61 or higher.

Rationale – This trade targets a wide range to the upside for a bounce in the stock on earnings and into the end of the year. This trade idea’s biggest attribute is that it defines risk to just 1.45 in a stock near long term support. If the stock breaks down from here below 50 that would represent a significant failure. This trade is like being stopped out at that level. The most that can be lost is 1.45, much less than the implied move on the event itself. On a move higher 56 is a good target as its just higher than the 200 day moving average, as well as being a little higher than the move implied on the event.