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NIKE, Inc. (NKE) Option Traders Eye an Earnings Miss

NKE's weekly put options were bought to open on Friday

by 3/18/2013 9:48 AM
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NIKE, Inc. (NYSE:NKE - 54.55) was heavily targeted by put players on Friday, with traders betting on some near-term struggles for the stock. Around 14,000 contracts traded on the day, more than five times the average daily volume for put options. NKE's weekly options were in focus, with 3,655 contracts collectively crossing the tape at the stock's 3/22 50- and 52.50-strike puts. The majority at each strike went off at the ask price, implied volatility ticked higher, and open interest rose over the weekend -- pointing to buy-to-open activity.

The deep out-of-the-money 3/22 50-strike puts were purchased for a volume-weighted average price (VWAP) of $0.20, meaning traders will reap a reward with each step south of $49.80 (strike less VWAP) Nike takes through Friday's close, when the options expire. The options market isn't too confident the puts will finish in the money, with delta for the position currently perched at negative 0.09. In other words, there is a slim 9% chance the option will expire in profitable territory.

Meanwhile, breakeven for the closer-to-the-money 3/22 52.50-strike puts is $52.01 (strike price minus VWAP of $0.49), or 4.7% below present levels. Delta for this put is negative 0.23, or 23%, suggesting a roughly 1-in-4 chance the option will be in the money by week's end.

From a wider sentiment standpoint, it's been calls, and not puts, that option traders have preferred in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 17,987 calls throughout the past 10 sessions, compared to 11,578 puts. The resultant call/put volume ratio of 1.55 ranks higher than 71% of other such readings taken in the last year, suggesting a healthier-than-usual appetite for long calls over puts.

On the charts, NIKE, Inc. has put in a solid performance since hitting its Nov. 14 low of $44.83, with the shares up more than 21%. Additionally, the stock found a foothold atop its 60-day moving average during NKE's most recent consolidation attempt.

Fundamentally, the athletic apparel issue is slated to report earnings after the market closes on Thursday. Given Nike's technical backdrop, as well as the withstanding sentiment in the options pits, Friday's preference for out-of-the-money puts could be shareholders picking up some options-related insurance ahead of the quarterly announcement. NIKE, Inc. has a mixed history in the earnings confessional, besting analysts' bottom-line expectations in three of its last four showings. For NKE's fiscal third quarter, Wall Street is calling for a per-share profit of 67 cents.


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