Nike Expectations High Ahead of Earnings

by Joseph Hargett | June 28, 2012 10:33 am

Sports clothier Nike Inc. (NYSE:NKE[1]) is slated to sprint into the earnings limelight after the close of trading this afternoon. Wall Street is expecting the company to post a fourth-quarter profit of $1.37 per share on revenue of $6.52 billion. In the same quarter last year, Nike earned $1.08 per share on revenue of $5.08 billion.

Historically, Nike has beaten the consensus estimate. In fact, the company has topped the Street’s view in each of the prior four reporting periods, with an average upside surprise of about 6.5%.

Still, Nike has some hurdles to overcome given the brokerage community’s high expectations. For instance, the whisper number places earnings at $1.42 per share, according to Furthermore, 14 of the 22 brokerages following the shares rate them a “buy” or better, with no “sell” ratings to be found.

This heavily bullish stance from analysts could leave NKE vulnerable if the company’s fourth-quarter figures fall short or if guidance is weaker than expected.

On the other hand, options traders have taken a very negative stance ahead of Nike’s quarterly report.

For instance, put volume tagged a fresh three-month high on Wednesday, with 20,935 of these typically bearish bets changing hands, versus call volume of just 6,438 contracts. The result was a single-session put/call volume ratio of 3.25 as puts more than tripled calls on the session.

Singling out yesterday’s weekly options activity, puts were nearly five times as popular, with 11,983 weekly June puts trading, versus call volume of 2,522 contracts. Since they expire at the close of trading tomorrow, these options are highly speculative and are as close to a pure earnings play as you are likely to find on NKE.

Pulling back to the July and August series of options, the put/call open interest ratio for this period arrives at 1.38, with traders showing a bit more optimism beyond NKE’s immediate reaction to earnings. That said, puts are still the option of choice, meaning that traders are either buying portfolio protection or speculating outright on a decline in NKE shares.

Looking at NKE’s technical backdrop, it’s easy to see why options traders are far from enthusiastic. Since hitting a near-term peak of $111.91 on May 29, NKE has plunged more than 13%. The shares have also breached several key support levels in the process, closing Wednesday below both its 200-day moving average and the psychologically significant $100 mark.

For those looking to follow the options crowd, a bear put spread could prove quite profitable. June options are pricing in a post-earnings move of a little more than 5%, but unless you’re an options professional, I would recommend against trading NKE’s weekly June options. Still, with a greater-than-5% move in mind, a July 97.50/100 bear put spread stands a good chance of hitting its maximum return.

At the close of trading on Wednesday, this spread was offered at $1.40, or $140 per pair of contracts. Given this data, breakeven lies at $98.60, while a maximum profit of $1.10, or $110 per pair of contracts, is possible if NKE closes at or below $97.50 when July options expire.

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