Options Traders Blast Nike Stock Ahead of Earnings

Once implied volatility crashes post-earnings, it might be a good time to buy puts on NKE shares

Jun 29, 2017 at 1:59 PM
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Nike Inc (NYSE:NKE) will report earnings after tonight's close. The shares are little changed ahead of the event -- last seen down 0.02% at $53.35 -- but options volume is running at a faster-than-usual clip. Nearly 40,000 puts and 28,300 calls have traded on NKE so far, two times what's typically seen at this point in the day. 

The weekly 6/30 55-strike call is most active, with 7,100 contracts on the tape, though it's unclear whether new positions are being opened or closed here. Options traders may be selling to open weekly 6/30 54-strike puts, though. While this would suggest put writers expect NKE to hold above $54 through expiration at tomorrow's close, they're more likely anticipating a post-earnings volatility crush, which will make the option cheaper to buy back. At last check, implied volatility on this weekly put was up 30.7% from last night's close.

More broadly, it's been put buyers who have been unusually active in NKE's options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 38,375 puts in the past 10 sessions, compared to 22,523 calls. The resultant put/call volume ratio of 1.68 ranks above all other comparable readings taken in the past year.

Drilling down, the weekly 6/30 52-strike and weekly 7/7 50-strike puts have seen the largest increases in open interest over the last two weeks, with 33,217 contracts collectively initiated. Data from the major options exchanges and Trade-Alert confirms buy-to-open activity at each, including a 10,000-contract block of the latter that was purchased for $930,000 (number of contracts * $0.93 premium paid * 100 shares per contract).

Overall, Nike has a mixed history of post-earnings price moves, moving higher in the session subsequent to reporting in four of the past eight quarters. Most recently, though, the shares plunged 7.1% in late March, after the athletic apparel retailer reported a revenue miss. This time around, the options market is pricing in a 6% swing in tomorrow's trading, regardless of direction.

Technically, Nike shares have been trading beneath a trendline connecting a series of lower highs since hitting a year-to-date high of $59 on March 21, the day before its last earnings reaction. And while the stock has added more than 5% since bouncing near its 2017 breakeven mark of $50.70 in mid-June -- in part due to Amazon rumors -- it's currently facing off against its 200-day moving average, which ushered NKE lower for much of 2016.

Looking ahead, though, the equity is entering a historically bullish stretch, with Nike being one of the best stocks to own in the final six months of the year. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, NKE shares have averaged a third-quarter gain of 9.8% over the past 10 years, and a second-half gain of 12.8%.

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