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How to Play the Nike (NKE) Earnings Announcement

While the earnings season is winding down, there are several companies announcing this week, and we are trading three of them.  I would like to share one of these with you, the one involving Nike. If you read down further, there is information on how you can become a Terry’s Tips Insider absolutely free!

How to Play the Nike (NKE) Earnings Announcement

Calendar spreads in NKE seemed so attractive that we placed 20 Apr-Mar4 spreads last week at three different strikes for an average cost of only $.33 – if the stock ends up anywhere between $52.50 and $57 (currently about $54.50), the long side of one of those spreads with four weeks of remaining life should be worth at least $1.00, more than covering the cost of all three.  

I checked prices this morning and the three spreads could be purchased for only a little more – an average of $.35. 

NKE announces earnings on Thursday, March 21st after the close.  Expectations seem to be high – whisper numbers are $.76 vs. analysts’ projection of $.68 and the stock has gained 20% over the past three months  – high expectations typically cause disappointment with some part of the announcement and a lower stock price afterwards. 

We will want to place trades that will allow for the stock to drop in price by a greater percentage than it could go up and still make a gain on the spreads.  Here are the trades that we placed:

NKE Graph for newsletter march 2013

NKE Graph for newsletter march 2013

NKE Graph 2 for newsletter march 2013

These spreads cost a little less than $3500 to place.  The diagonal put spread is the most expensive, but will about double in value if the stock moves down to $52.5 or lower. 

Here is the risk profile graph which shows the likely gains or losses at the close of trading on Friday:

NKE Graph 2 for newsletter march 2013

Implied volatility (IV) of the Mar4-13 options (43) is nearly double that of the Apr-13 options (23) which gives us a large IV advantage with these calendar spreads.  In the above graph, we assumed that IV of the April options would fall to 20 after the announcement. 

The graph shows that if the stock falls less than 8% on Friday or goes up by less than 5%, we should make a gain with our positions.  The highest gain (about $2000 on an investment of about $3500) would come if the stock were to fall about $2 after the announcement. 

We like our chances here.   

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Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s) or give him your thoughts. 

You can see every trade made in 8 actual option portfolios conducted at Terry’s Tips and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself?

Even better, you can become a Terry’s Tips Insider, and receive all our educational reports and materials absolutely free by opening a new account at the best options broker around – thinkorswim. Use this link to sign up – open thinkorswim account – and once you have funded your account with at least $3500, email Seth@TerrysTips.com and let him know that you have done it, and this is what he will do – sign you for our Premium Service package ($119.95 value plus an extra 4 months of our Premium Service, valued at another $190.80).  You get $300.65 worth of services without paying us one penny.

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