Considering Our Options: $NKE Dec 95 / 92.50 Put Spread

So this one has been a battle to say the least. I’m long the NKE Dec 95/92.5 put spread at a cost of 42c going into the earnings announcement and with only 1 day until expiration. At the moment the trade isn’t the one I would put on if initiating right now. But, like I said, it’s been a battle with twice selling weeklies to fight the premium decay on this position. (See below for the complete history of the trade)

I don’t feel strongly one way or another on the earnings announcement, at this point I think it could go either way, largely depending on forward guidance.  And as it stands right now I can get out for around even. Or, if stock sells off into the close, I could get out for a small profit.

Option One: Take it off now for around the cost of the trade, move on.

Option Two: Hope for a late day selloff into earnings and take it off for a small profit.

Option Three: Let it ride and hope stock sells off on the announcement, giving a chance to take it off for a profit in the morning.

Option Four:  Roll the bearish thesis into Jan, maybe even consider selling Dec to Jan.

What I’m going to do is see how the stock trades into the close, and if given a chance to get out for a small profit I will do just that. If not given the chance I’m going to let it ride knowing full well it could be worthless. If one was concerned about losing the 42c cost, taking it off right now for even isn’t the worst decision in the world.

 


2nd Trade Update Dec. 13th, 2012:  NKE is back down to the level that I originally bought the Dec7th /Dec22nd 95 Put Spread for 1.40 on Nov 30th.  To refresh everyone’s memory, when the Dec7th 95 Puts expired worthless last Friday, I then sold the Dec14th (tomo expiration) 95 Puts to once again reduce the cost of owning the Dec22nd 95 Puts (now my cost is $1.09) for their Dec 20th fiscal Q2 earnings event.

With the stock down nearly 2% today, and a little more than 1 day left to tomorrow’s weekly expiration, I am going to use the weakness to set up for my earnings trade next week.  I am going to take a little premium risk off here and just sell the Dec22nd 92.50 put to create a Dec 95/92.50 Put Spread, and cover the Dec14th (tomo expiration) 95 Put.

Action: Sold to Open the NKE ($97.20) Dec22nd 92.50 Put at .76
Action: Bought to Close the NKE ($97.20) Dec14th 95 Put for .10
New Position: Long NKE ($97.20) Dec22nd 95 / 92.50 Put Spread for .42*

*Original Cost of Dec7th/Dec22nd 95 Put Spread was 1.40, less the .21 I made on the sale of the Dec14th 95 Puts last week, now less the .76 I just collected selling the Dec22nd 92.50 Puts.   MY MAX RISK IS NOW .42 for the Dec22nd 95/ 92.50 Put Spread.   Break-even is now 94.58 on the downside, btwn 94.58 and 95 lose up to .42

Trade Rationale: I could take my profits and move on, but given the poor performance of other high end consumer discretionary retailers, I want to play for a disappointment on earnings,  U want to use today’s weakness to lock in a very favorable cost for a $2.50 wide put spread.

 


Trade Update Dec. 7th, 2012:  Last week I bought a Put Calendar in NKE, selling today’s expiration 95 put and buying Dec22nd 95 Put (which catches their Q2 earnings on Dec 20th).  The idea was too define the range that NKE would trade in over the next week and fiance the purchase of the Dec 95 puts for my earnings trade.

Now with NKE $1 higher than where I put the trade on, the Dec7th weekly 95 puts are going to expire worthless, I sold them last Friday at .50, and the Dec22nd 95 puts that I bought for 1.90 are now worth 1.32 (stock ref 98.25).  SO the position is down about .08.

I am now going to sell next week’s (Dec14th expiration) 95 puts at .31 to further reduce the cost of the Dec22nd 95 Puts that I want to own for earnings.  My hope is that over the next week the stock trades lower, but closes above 95 and the weeklies I sell today expire worthless, and then at that point I will sell a lower strike Dec22nd put against the 95 puts that I own to further reduce my cost basis.

I know that was annoying, but this trade takes some management and I want to be as clear as possible about how I am proceeding…..so to recap, letting the Dec7th weekly 95 put that I am short expire worthless and now will sell the Dec14th 95 put to create a Dec14th weekly/ Dec22nd 95 put Calendar.

ACTION: Sold to Open the NKE ($98.25) Dec14th weekly 95 Put at .31

 

New Position: NKE Dec14th weekly / Dec22nd 95 Put Calendar for 1.09 *

 

*My original cost of the calendar was 1.40, now I reduce the cost further.

 

 


Original Post Nov. 30th, 2012:  New Trade $NKE: Using Dec Weekly Puts to Finance My Bearish Earnings Trade

Readers of my little rant in the MorningWord this am (here) can tell that I am a bit skeptical of YUM’s about-face on their recent guidance of sales in China.  Last night’s press release, which was released a week ahead of their scheduled analyst meeting next week (Dec 6th), reiterated their 2012 EPS growth forecast of at least 13% and put forward guidance of at least 10% EPS growth in 2013, which was below consensus estimates of ~14% for both 2012 and 2013.  YUM’s near 10% decline today is largely a result of  their China comp sales guidance of down 4%, well below consensus and their previous guidance given in early Oct of up 2.5%.  I’ll save you further rants about YUM at this moment, but the this week’s disappointing results from TIF and now YUM, makes one thing clear, regardless of the timing and the results of the “fiscal cliff” negotiations in Washington, U.S. multi-nationals continue to face a conundrum of slowing global demand and higher input costs.

NKE is a name that we have expressed bearish views throughout 2012, largely given their dependence on international sales for future growth.  In their most recent quarterly report back in late Sept, NKE disappointed investors with weaker than expected gross margins as a result of discounting in an effort to clear old inventory, but more importantly, NKE saw a fairly dramatic decline in futures orders from China, down 6% vs analyst estimates of up 1.2% for the period, while worldwide orders for this quarter were expected to be 2% below analyst expectations.

Event: NKE is expected to report fiscal Q2 earnings on Dec 20th, it is a bit early to get a definitive read, but the options market is implying about a 3.75% move post earnings which is just a little shy of the 4 qtr avg move of about 4.2%.

Price Action / Technicals:  After making new all time highs earlier this year, the stock has been a bit erratic to say the least, while it is flat on the year it is about 16% off of the 52 week highs and about 14% off of the 52 week lows.

On a short term basis, NKE is banging up against some fairly reasonable resistance at ~$100, which it most recently failed to break above, which also happens to be right below the 200 day moving avg.

NKE 1 Yr chart from Bloomberg

 

On a 4 year basis, the stock could be at an inflection point, below the long term uptrend line, but just recently bouncing off of 1 year support at $90.

NKE 4 yr chart from Bloomberg

 

Volatility: Dec vol is in the high 20’s today and will likely be higher as earnings approach. With only 2 days between the earnings and expiration, expect Dec vol to skyrocket to keep up with what would be the normal decay in a non earnings expiration week. This will keep Dec bid as market makers will not let the straddles get below a certain point and leave themselves at risk. Here is how the skew looks in the Dec weeklies, Dec regulars and Jan:

Expiration skew from LiveVol Pro

As you can see the Dec weeklies are heavily skewed as they approach their expiration and get bid up due to their dollar cheapness. The Dec and Jan regulars have a lesser downside skew that is similar in both months with Dec being higher vol overall.

Sentiment: given the last 2 straight quarterly disappointments, Wall Street analysts have gotten considerably less bullish on the stock with 11 Buy ratings and 12 Hold ratings with any avg 12 month price target of ~$104.

My View: NKE stock is in a bit of “no mans land”, while investors would like to hope that the company’s previous acknowledgement of slower than expected sales in emerging markets is closer to the end of a cycle rather than the continuation of a longer downtrend.  My guess is the latter. As investors in the U.S. continue to be fixated on fiscal issues at home, we have seen our share data-points overseas that suggest that the global economy continues to face massive macro headwinds.

While I hate pressing a stock on a big down day (NKE down 1.8% in sympathy with YUM), I am going to initiate a trade a calendar structure that is not short a lot of deltas, until my short portion rolls off, then I will look to further reduce the cost by spreading into a vertical for the earnings event.

 

Trade: NKE ($97.25 ) Bought the Dec 7th weekly / Dec 22nd Regular 95 Put Spread for 1.40

-Sold 1 Dec7th weekly 95 Put at .50

-Bought 1 Dec22nd regular 95 Put for 1.90

Break-Even on Dec 7th weekly Expiration:

-On next Friday’s close, if NKE is 95 or higher, I will own the Dec 22nd Regular Expiration 95 Put for 1.40, at that point I will look to sell a lower strike put against the one that I own to further reduce my break-even.
-Over the next week, if and when the stock goes lower, and if it is below 95, I will make the difference btwn the option that I am short and the one that I am long, but to capture the profit I would need to close the trade. Aside from a broad market sell-off I am not expecting the stock to get drilled prior to earnings.
-My Max risk is the 1.40 that I spent for the calendar.
Trade Rationale:  While the Dec 7th weekly Puts are not expensive on a vol basis, they appear expensive from a $ standpoint. I want to take advantage of this premium to fiance my bearish view into earnings.
Share Button