Nike will report its fiscal second-quarter earnings Tuesday after the market close. Analysts expect EPS of 65 cents with revenue of $12.57 billion. Investors who think Nike may miss the mark can buy a put option on the athletic apparel giant.
With Nike stock trading around 108 investors can consider buying the 105 put with a Dec. 23 expiry, a few days after the earnings report. This put was trading at around $2.60 late Thursday, which equates to a maximum loss of $260 should Nike trade above 105 on expiry.
Given that this put is short-dated and out of the money, it is likely that the maximum loss will occur and the put will expire worthless. However if Nike has a poor earnings report and shares crash, the profit on this trade could be huge. Theoretically, the trade would profit until the stock goes to zero.
Options on Nike are currently implying a 6.8% move on its earnings, which is right in line with historical moves. However there are a few factors that suggest that the move this quarter could be higher. Despite beating estimates, last quarter's report saw shares crash almost 13% as inventories soared.
That fall saw Nike stock reach a 52-week low of 82.22. Ever since, shares have rebounded sharply thanks to a combination of factors, including an easing of financial conditions, expected drawdown of inventories and an exit in China from its zero-Covid policy.
Nike Not Out Of The Woods In China
All these together could point to earnings coming in on the high end of guidance. Arguably, with the large run in share price, this information is likely priced in.
Importantly, while China has eased its Covid restrictions, the shift came not from a decline in Covid cases — cases have actually spiked — but by rare protests, including at an Apple factory in Zhengzhou, that rocked the country,
Many Chinese residents have not contracted Covid and of the elderly age 80 and older, only 40% have had a third booster dose of a vaccine.
With limited capacity of intensive-care beds, the government may be forced to reimpose lockdowns or risk the chance that cases will skyrocket. Both options are unfavorable for Nike. China accounts for 36% of Nike's shoe manufacturing and is the company's second-biggest revenue source, having brought in $1.65 billion in the first quarter in sales there.
Nike stock, a Dow component, has an IBD Composite Rating of 66. Shares have been trading with strength but have found resistance at the 200-day moving average.
On Dec. 6, we discussed another option strategy on Nike earnings. That one works on the premise that Nike stock won't move much on the earnings report.
