Short-Term Nike Options Price in Outsized Earnings Reaction

Call traders today may be bracing for a post-earnings volatility crush

Sep 24, 2018 at 11:30 AM
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Nike Inc (NYSE:NKE) is scheduled to report fiscal first-quarter earnings after the market closes tomorrow, Sept. 25. The retail shares have been volatile in recent months, per NKE's 60-day historical volatility of 27.8% -- in the 78th annual percentile -- and options traders are pricing in a bigger-than-usual post-earnings swing for Wednesday's trading.

At last check, Trade-Alert pegged the implied daily earnings move for NKE at 8.6% -- well above the 4.8% next-day move the stock has averaged over the last two years. It's been a mixed bag as to whether the reactions have been positive or negative, though Nike shares swung 11% higher the day after the retailer's June report. What's more, this post-earnings performance and an 11% surge in June 2017 are the only two times in the last eight quarters the stock has met or exceeded the percentage move the options market is currently pricing in for the stock.

Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) suggests NKE options traders are bracing for another big move to the upside. Specifically, speculators have bought to open 25,272 calls in the last 10 days, compared to 12,700 puts. The resultant call/put volume ratio of 1.99 ranks in the 76th annual percentile, meaning the rate of call buying relative to put buying has been quicker than usual.

Call volume is accelerated again today, with roughly 17,000 contracts traded so far -- more than double what's typically seen at this point. Speculators may be buying to open weekly 9/28 86-strike calls for a volume-weighted average price of $1.68, which would make breakeven at this Friday's close $87.68 (strike plus premium paid).

However, the weekly 9/28 84.50-strike and 90-strike calls are most active, and it looks like traders may be selling to open these options. If this is the case, the call writers are either setting short-term ceilings for NKE stock, or anticipating a post-earnings volatility crush. The at-the-money implied volatility (IV) term structure on weekly 9/28 Nike options is 66.25%, compared to 30.85% for the standard October series.

Looking at the charts, Nike shares were last seen trading down 1.1% at $84.59, as broad-market headwinds offset a price-target hike to $96 from $90 at Stifel. The Dow stock has put in a strong performance over the long term, though, up 35.1% year-to-date. Plus, NKE quickly shook off a negative reaction to the company's use of controversial NFL quarterback Colin Kaepernick in its latest ad campaign, and topped out a record high of $86.04 last Friday, Sept. 21.

nke stock daily chart on sept 24

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