One of the advantages of defined risk event trading as an alternative to owning a stock is that it allows for some nimbleness if initially wrong. A little over a week ago we looked at Nike (NKE) into its earnings event. We also detailed a defined risk bullish trade as an alternative to owning stock or buying an at the money call outright. Here was the original trade idea and From March 20th:
After the stock’s nearly 15% year to date gains, which might discount some good news, short dated options prices elevated, it might make sense to consider a call calendar, selling short-dated upside call to finance the purchase of a longer dated one, this strategy opposed to an outright June at the money call purchase might be a tad more forgiving if the stock does not immediately make a post-earnings upside move.
NKE (58.50) Buy the Apr/June 60 call calendar for .70
- Sell 1 April 60 call at 1.05
- Buy 1 June 60 call for 1.75
NKE got slammed on earnings and with the stock down 6% the day after we updated, mentioning the limited damage vs the stock’s decline and how those looking to make that loss back could roll down strikes on the same trade. From March 22nd:
Obviously, with NKE down 6% today this is a loser. But it’s worth .35 here for a .35 loss, versus a 3.40 loss in the stock. So damage was limited. As far as trade management it’s best to close the current position as 60 suddenly feels pretty far away. For those that want to buy the dip in NKE for a move higher from here, the same trade but on the 57.5 strike now makes sense (for a similar dollar amount, the Apr/Jun 57.5 call calendar is .65) That gives a chance to make back the .35 if NKE were to bounce back towards 57.50 into April expiration.
Nike has since bounced back and with the stock now 56.75 the April/June 57.5 call calendar is worth .95 for a .30 gain on the roll after the .35 loss on the initial trade. The new strikes are also in great shape for further gains, especially if the stock creeps a little higher from here into April expiration.
The key point is that the stock got hit hard on the event, but by defining risk to just .70, and limiting the initial loss to .35, you can stay nimble in the position and look to play for a bounce from an even better entry lower. If the April 57 calls expire worthless what will be left is a fairly inexpensive look out until June and the ability to roll the short call part of the calendar to get back to the original premium at risk or better.