After the close of trading tomorrow, sporting apparel giant Nike Inc (NYSE:NKE) will step up to release its third-quarter earnings report. NKE stock has been flat-footed so far this year, a stark change to the 20% run-up that occurred in the fourth-quarter of 2014.
With the summer approaching, and the “athlesiure” trend still dominating U.S. fashion, Nike stock could soon be back to the races.
Bad puns aside, Wall Street is expecting solid growth from NKE earnings. For the quarter, the consensus is forecasting earnings to increase 10.5% to 84 cents per share. Revenue, meanwhile, is expected to rise 9.3% to $7.62 billion.
There is a heavy thread of optimism running through Nike’s sentiment backdrop, however. According to EarningsWhisper.com, some in the brokerage community have set their sights on third-quarter earnings of 89 cents per share. An outsized beat may not be a bad bet, as Nike has topped Wall Street’s targets in each of the past 10 quarters.
Looking out further, analysts are considerably more restrained in their projections for Nike stock. According to Thomson/First Call, NKE has attracted 20 “buy” ratings, 10 “holds,” and zero “sells.” However, the 12-month consensus price target of $105 represents a meager premium of only about 9% from yesterday’s close, leaving plenty of room for improvement if Nike puts up solid numbers tomorrow afternoon.
The outlook is much different over in the options pits. Currently, the front-month put/call open interest ratio for NKE stock rests at 2.43, with puts more than doubling calls among options set to expire at the end of this week. Furthermore, sentiment is nearly the same when we pull out for a broader look, with the March/April put/call open interest ratio arriving at 2.10.
Click to Enlarge Overall, March option implieds are pricing in a potential post-earnings move of about 4% for NKE stock. This places the upper bound at $100.52, while the lower bound lies at $92.48. A breakout above $100 would be both technically and psychologically significant for NKE stock, and could lead to a sharp resumption of the share’s longer-term uptrend. A plunge to the $92 region, however, could lead to follow-through selling that sees NKE test round-number support near $90.
2 Trades for NKE Stock
Call Spread: Given Nike’s strong fundamental track record, the stock’s (up until recently) strong price action, and the lingering pessimistic sentiment on the shares, I’m inclined to take a contrarian stance on the shares. As such, traders looking to buck the trend in the options pits and bet bullishly on NKE might want to consider an Apr $95/$100 bull call spread.
At last check, this spread was offered at $2.43, or $243 per pair of contracts. Breakeven lies at $97.43, while a maximum profit of $2.57 is possible if NKE stock closes at or above $100 when April options expire.
Put Sell: On the other hand, there are market headwinds at play (the Federal Reserve, oil, a strong dollar, etc.) that could limit or completely disrupt a NKE rally even if the company posts better-than-expected results. As such, a Mar $90 put sell may be a way to capitalize on support in the stock’s technical backdrop.
At last check, the Mar $90 put was bid at 23 cents, or $23 per contract. As will all put sell positions, you will keep the initial premium of $23 per contract if NKE closes at or above $90 when March options expire at the end of this week. However, if NKE trades below $90 prior to expiration, you may be assigned 100 shares of NKE stock for each put sold at a cost of $90 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
