Nike (NKE) is due to report earnings this Thursday after the closing bell. The Barchart Technical Opinion rating is a 100% Sell with a strongest short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
Nike rates as a Strong Buy according to 16 analysts with 3 Moderate Buy, 6 Hold ratings and 1 Strong Sell rating. Implied volatility is 36.31% which gives NKE an IV Percentile of 62% and an IV Rank of 48.01%
Today, we will analyze three different ideas:
- A Short Iron Condor
- A Bear Call Spread
- A Short Strangle
Short Iron Condor
The first strategy is a short iron condor. An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Using the September 29 expiration, traders could sell the $85-strike put and buy the $80-strike put. Then on the calls, sell the $96 call and buy the $101 call.
Yesterday, that condor was trading around $1.20 which means the trader would receive $120 into their account. The maximum risk is $380 for a total profit potential of 31.58%.
The profit zone ranges between $83.80 and $97.20. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Let’s take a look at another potential option strategy.
Bear Call Spread
Traders thinking that NKE might continue with its bearish bias could just trade the bear call spread side of the iron condor.
Trading just the bear call spread side would involve selling the September 29th $96 call and buying the $101 call. This spread could be sold yesterday for around $0.55 or $55 in total premium.
The maximum gain is $55 with total risk of $445 for a potential return of 12.36% with a breakeven price of $96.55.
The final idea we will look at is a short strangle.
Short Strangle
Short Strangles involve naked options so are not recommended for beginners, but let’s take a look at how we might set one up for NKE earnings.
A short strangle could involve selling the $85-strike put and $96-strike call. Unlike the iron condor, with a short strangle, there is no protection via the bought options. As such, short strangles have unlimited risk and are therefore not suitable for beginners.
Selling this short strangle would generate around $160 in premium. The breakeven prices for the trade would be $83.40 and $97.60.
These call the calculated by taking the short put strike and subtracting the total premium. Then taking the short call strike and adding the total premium.
Conclusion And Risk Management
There you have three different trade ideas for Nike’s earnings. The iron condor and bear call spread are risk defined trades, so you always know the worst-case scenario even if NKE makes a bigger than expected move.
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital. Short strangles involve naked options and should be avoided by beginner traders.
Short-term trades also have assignment risk, so traders need to be aware of that possibility.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
