NKE Options Trading Idea
NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, mens training, womens training, action sports, sportswear, and golf. The company offers performance and brand advertising services and has Earnings on 5.29.2017. The company’s stock is currently trading around $52.60 in a 52 week range of $49.01-$60.33. The stock has been shown on weak over the past year with shares down 4.73% over the past 12 months. I think that the upside has more to come and NKE will pop hard on Earnings. To confirm this signal we will analyze the stocks historical movement record on earnings, the current expectations for movement being priced into the options market, the technical setup, and institutional order flow into the event.
First we will examine the stocks historical earnings performance record. We can see that over the past 8 quarters the stock has rallied 4 times on earnings day with an average move of 4.4%. This does not tell us that the stock is guaranteed to rally this quarter but it does show us that there is a slight bullish bias in the performance of NKE on earnings day. This means that as we work through the rest of our analysis will have a bullish bias.
With a sense of how the stock has moved on earnings day in the past we can calculate the expected movement for this quarter. To best isolate the expected movement in NKE we will use the shortest dated options that still contain the catalyst event. In this case we will use the June 30rd weekly expiry. To measure the market makers expected move we will need to calculate the price of the at the money straddle. We looked at the NKE $3.00 strike straddle in the June 30rd weekly expiry and it is implying a whopping $3.00 move.
The straddle is marking around $3.00. This implies an expected move of around $3.00. This implies a move of around 5.2% by Friday’s expiry. Since this is in line with the stocks historical movement record we know that there an opportunity to put on a good reward vs risk setup GOOGL.
Upside target = $52.60 + $3.00 = $52.60
Downside Target = $52.60 – $3.00 = $49.60
With these targets in mind we can look at the chart in NKE to see if trend agrees with the bullish bias in NKE price action.
Here we can see that the stock is trading below the Ichimoku Cloud, but I think it has found a short term bottom in the last week. One last indication also points to the possibility for a move to the upside in NKE.
I think that NKE will move higher on Earnings, but I want to make sure I am getting a favorable reward to risk setup. I think the stock will move higher, but I am not sure how much
Potential trade: Buying NKE June 30rd $53.5-$55.5-$57.5 Call Butterfly for $.35 credit
Risk: $35 per 1 lot
Reward: $165 per 1 lot
Breakeven: $53.85 and $57.15
This kind of analysis can be used to find setups like this ahead of earnings and other catalyst events.
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