Last month I initiated a trade in Nike (NKE) that would help finance the purchase of longer dated calls in anticipation of a potential breakout following last night’s fiscal Q1 earnings (read here). The thesis from Aug 19th was fairly simple, after such a long consolidation, the slightest bit of good news could cause a fairly substantial breakout. Well, the idea was correct, as the stock is making new all time highs this morning up more than 10%, but the execution and timing of my trade was horrible. A couple weeks ago after the stock broke out above by my strikes I closed the position for a small gain as I ran the risk of the trade turning into a loser if in fact the stock ran too far to fast (read here).
Don’t let anyone tell you that trading is NOT hard, as sometimes in an effort to manage risk capital in event driven trades I out smart myself, which was very much the situation with NKE over the last month.
After today’s move, it seems that the breakout is a bit overdone near-term and the highest probability over the next few weeks would be for the stock to consolidate some of these gains. This is where trading this view with options makes a lot more sense than trying to thread the needle with a call calendar on a directional play as I did back in August.
So here is the trade, playing for a near term consolidation in the middle of the last week’s range (basically $79 to $89):
TRADE: NKE ($88.35) Buy to Open Oct 90/85/80 Put Butterfly for 1.75
-Buy 1 Oct 90 Put for 2.55
-Sell 3 Oct 85 Puts at .44 each or .88 total
-Buy 1 Oct 80 Put for .08
Break-even on Oct Expiration:
Profits: gains of up to 3.25 between 81.75 and 88.25, max gain of 3.25 at 85
Losses: up to 1.75 between 8o and 81.75 and between 88.25 and 90, with max loss of 1.75 below 80 and above 90
Rationale:
This is essentially a short of the stock with a target of $85. The nice thing about this structure vs. shorting the stock is that if the stock squeezes higher above $90 the most that can be lost is $1.75. The sweet spot of the trade is at $85 and we’d likely take the trade off if the stock reverses towards that area quickly.