I’ve always been a believer that earnings events have a binary effect on their underlying equities. The reactions are often short term and a complete coin flip. Market expectation is what drives the event price, not the quality of the reports.
This week Nike Inc (NYSE:NKE) reported and the stock fell 7% on the news. Consensus instantly flipped against Nike stock on this dip.
I somewhat agree yet I still want to go long it today.
Instead of buying NKE at $55 per share I will use options to get paid to be long and with a hefty price buffer. The key is to find value levels against which I can sell premium.
The fundamentals are not a disaster, so there should be value to the stock. Technically, this dip foiled a potential upside target and now is in the clutches of a support zone.
If lost, NKE stock could fall to retest $50 per share or lower.
Click to Enlarge They say that most options expire worthless … So I will be selling longer-dated NKE puts and let time do the work for me.
NKE Stock Trade Idea
The Bet: Sell the NKE Jan 2018 $42.50 naked put for $1 per contract. This is a bullish trade that needs NKE stock to stay above the put sold to win. Otherwise, I would be forced to buy NKE stock at that price. Anything below $41.50 per share would accrue losses for me.
Usually I like to sell opposing risk to balance my trade. In this case and since NKE fell so hard, I will delay such an entry so I don’t sell the risk at a severe discount. If NKE bounces, then I can add a trade to sell the calls and create a short strangle. Until then, I am confident that with the size of the buffer and the time until expiration, I will be able to manage the short risk.
Since the retail sector is out of favor in Wall Street, I could balance the trade by selling some upside risk in the retail sector exchange-traded fund SPDR S&P Retail (ETF) (NYSEARCA:XRT).
The Hedge (Optional): Sell the XRT Jan 2015 $49/$50 credit call spread for 37 cents. This is a bearish trade that has an 82% theoretical chance of success. Although this is not a direct hedge to NKE stock, it somewhat balances the relationship of Nike and the retail sector as a whole.
Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
