Tim Bovee, Private Trader: NKE Analysis

Tuesday, June 28, 2016

NKE Analysis

Update 8/8/2016: NKE moved slightly above the upper boundary of my iron condor and was on a three-day uptrend that showed no signs of abating. I exited for a loss within two weeks of expiration.

Shares rose by 6.9% over 41 days, or a +61% annual rate. The options position produced a 29.8% loss on debit for a -266% annual rate.

The designer and manufacturer of sports footwear and other apparel Nike Inc. (NKE), headquartered in Beaverton, Oregon, publishes earnings on Tuesday after the closing bell.

[NKE in Wikipedia]

NKE

I shall use the AUG series of options, which trades for the last time 52 days hence, on Aug. 19.

Ranges

Implied volatility stands at 35%, which is 1.8 times the VIX, a measure of volatility of the S&P 500 index. NKE’s volatility stands in the 60th percentile of its most recent range. The price used for analysis was $52.36.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	59.18	66.00	55.42
Lower	45.54	38.72	49.30
Gain/loss	±$6.82	±$13.64	±$3.06

Implied volatility 1 and 2 standard deviations; central tendency earns move

The Price of Prosperity: Why Rich Nations Fail and How to Renew Them
Todd G. Buchholz

The Trade

NKE peaked in December after a years-long run-up and began working its way lower in a clear downtrend.

The price has fallen as often as it has risen on the first trading day after the last four earnings announcements, two times in each instance.

Brokers in aggregate give NKE a 38% enthusiasm, with 69% of 26 analysts issuing strong buy recommendations.

Given the disconnect between the chart and analyst opinion, I shall go with a direction-neutral trade.

Iron condor, short the $55 calls and long the $57.5 calls,
short the $45 puts and long the $42.50 puts,
sold for a credit and expiring Aug. 20.
Probability of expiring out-of-the-money

AUG	Strike	OTM
Upper	55	70.88%
Lower	45	85.9%

The premium is $0.80, which is 32% of the width of the position’s wings. The stock at the time of entry was priced at $52.29.

The risk/reward ratio is 2.1:1.

The zone of profit in the proposed trade covers a $5 move either way. The biggest immediate move after each of the past four earnings announcements was $4.49, and the average was $3.05. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.06.

Decision for My Account

I have opened a position on NKE as describe above. The options grid, with its $2.50 sprad between strike prices, was a bit challenging to work with. In order to get a sufficiently low risk/reward ratio, I had to narrow the odds of the position expiring out of the money for maximum profit. I chose to narrow on the upside, given the downtrending nature of the chart. The result is a 71% chance of profitability on the upside vs. an 86% chance on the downside, a fairly significant skew.

-- Tim Bovee, Portland, Oregon, June 28, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.