NKE Analysis

Nike Inc. (NKE)

NKE publishes earnings on Tuesday after the closing bell.

I shall use options that trade for the last time 10 days hence, on Oct. 6.

Implied volatility stands at 31%, which is triple the VIX, a measure of the volatility of the S&P 500 index.

NKE’s IV stands in the 80th percentile of its annual range and at the peak of its most recent broad movement.

The price used for analysis was $53.25.

Premium: $3.10 Expire OTM
NKE-iron fly Strike Odds Delta
Long 59.50 90.9% 11
Break-even 56.60
Short 53.50 53.7% 50
Short 53.50 46.2% 50
Break-even 50.60
Long 47.50 92.5% 6

The premium is 52% of the width of the position’s wings.

The risk/reward ratio is 0.9:1.

The zone of profit in the proposed trade covers a $3.00 move either way. The biggest immediate move after each of the past four earnings announcements was $5.83, and the average was $3.38. After eliminating the maximum and minimum post-earnings movements, the central tendency is $3.59.

The expected move covering 85% of occurrences is $2.90, within the zone of profit.

The bid/ask spread is 2.9%.

Decision for My Account

The problem is the coverage. The best trade structure is fine when considered in terms of the expected move, calculated from the straddle counterpart to the iron fly I built. There’s not a lot of leeway, only a dime, but it meets my criteria.

The last four earnings announcements are a different story, however. NKE has routinely made moves that exceed the profit zone on this trade, even when outliers are discarded to focus on the central tendency.

The earnings surprise predictor from Zacks Investment Research is 0.35% for an upside earnings surprise, a fairly weak indicator. Were it stronger I would consider an bullish directional trade, but it is too weak for that tactic.

I count the coverage risks shown by historical post-earnings moves as unacceptable, and I am passing on NKE. No trade.

And a note on psychology: Nike is a household name, especially since I live in Portland, Oregon and Nike’s headquarters is only a few miles away. I find it to be extraordinarily hard to walk away from a trade on NKE, or the other household names, such as AAPL or FB or MSFT. That shows the importance of making trading decisions only by the numbers of the method you’ve chosen, not by fame or other elements outside of your method.

By Tim Bovee, Portland, Oregon, Sept. 26, 2017


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.

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