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NIKE Option Players Expect a Bearish Start to the New Year

Put volume on NKE has been accelerating in recent months

by 12/14/2012 12:30 PM
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There's been a growing demand for NIKE, Inc. (NYSE:NKE - 97.46) puts among option traders, as evidenced by the stock's rising Schaeffer's put/call open interest ratio (SOIR). Since Nov. 19, NKE's SOIR has jumped to 1.62 from 1.39, as near-term put open interest increased 66%. This ratio is now ranked in the 90th percentile of its annual range, indicating short-term speculators have been more put-heavy just 10% of the time within the past year.

This trend is echoed in data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which shows traders have accumulated 2.49 puts for every call on the stock during the past 50 sessions. This put/call volume ratio of 2.49 ranks just one percentage point from a 52-week peak, suggesting puts have been bought to open over calls at a near annual-high pace in recent months.

Puts are easily outpacing their call counterparts in today's session as well. Nearly 9,500 puts have changed hands at last check, almost double the number of calls traded. Short-term speculators have turned their attention to NKE's January 2013 87.50-strike put, which has seen around 3,700 contracts cross the tape. Almost all of these have gone off at the ask price, and volume is outstripping open interest, making it safe to assume that a portion of today's activity is of the buy-to-open variety.

By initiating these long puts, speculators need NKE to fall below $86.70 (the strike minus the volume-weighted average price [VWAP] of $0.80) by January expiration in order for the bets to be profitable. Considering the breakeven level for these deep out-of-the-money puts is an 11% drop from NKE's current perch, it could be that some of these puts are being purchased as portfolio protection. In this scenario, investors have locked in a selling price for their shares at $87.50, should NKE take a steep slide over the next five weeks. However, the primary goal of the shareholders would be for the puts to expire worthless at the close on Jan. 18.

Technically, NKE had a strong start to 2012, rising to a record high of $114.81 on May 3. The stock began to lose steam after hitting this milestone, and is now sitting on a nearly imperceptible 1% year-to-date gain. Additionally, the equity has been bouncing between its 50- and 120-week moving averages since taking a steep earnings-induced slide in late June.

Weekly Chart of NKE Since January 2012 With 50-Week and 120-Week Moving Averages

The athletic apparel company is scheduled to unveil earnings before the market opens next Thursday, Dec. 20. NKE has a mixed history in the confessional, besting analysts' bottom-line expectations in three of the last four quarters. Wall Street is calling for a profit of $1 per share for NKE's fiscal second quarter.


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