A strategy idea for options trading investors.
We’re looking ahead to next week for our latest earnings trade. On Monday after the close, athletic shoe and apparel giant Nike (NYSE: NKE) will enter the earnings confessional. And it may not be a pretty sight.
Escalating costs and price-sensitive consumers is not an attractive combination for profit growth and robust margins. And NKE is facing both. Analysts expect a 9% increase in EPS from a year ago, which is in line with what the company has delivered over the past year. But the outlook may be pressured by a tougher sales environment.
The stock has fared poorly after the past two reports, gapping 9% and 6% lower in just the one day after reporting. The stock could be setting up for another drop, as sentiment appears far too positive given the fundamentals and recent stock performance. Short interest and the put/call ratio are low, and 11 of 15 analysts consider NKE a “buy.” The company will need to have a solid earnings beat and an impressive outlook to satisfy this level of optimism.
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On the charts, the stock is down nearly 5% so far this year and is sinking toward the key 80 level that has provided support several times during the past nine months. All daily trend lines that we watch are currently above the stock price so don’t look for any support there. If 80 gives way (as we suspect it will after earnings), the next area of support is the 75 region, which defined the March low. That’s another 8% of downside.
Could NKE blow out earnings and pop higher? Anything’s possible. But the odds are stacked against it. With high expectations running more on reputation than recent performance, NKE will be hard pressed to impress the Street on Monday. Buy the NKE July 82.50 Put for around $3.50 or less.
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