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:
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:
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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