Nike Options Bulls Win Big Ahead of Earnings

A round of bullish brokerage notes helped send NKE to new highs

Dec 21, 2017 at 3:11 PM
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Subscribers to Schaeffer's Leverage service nearly tripled their money on our Nike Inc (NYSE:NKE) December 52.50 call recommendation. Here's a closer look at what initially drew us to NKE stock, and how the successful options trade unfolded.

When we recommended the call option on Monday, Nov. 6, Nike stock was trading near $56. The shares had recently broken out above the $55 level -- home to NKE's Aug. 18 post-earnings close and 200-day moving average -- after the athletic apparel name provided an upbeat five-year forecast at its annual investor day. A negative earnings reaction for sector peer Under Armour (UAA) had NKE successfully testing these levels, suggesting support was firmly in place.

Despite this encouraging technical setup, there was room for analysts to upgrade the Dow stock. Of the 28 brokerages covering Nike at the time, 16 maintained a "hold" or "sell" recommendation. A round of bullish brokerage notes could bring more buyers to the table.

Plus, options traders were overwhelmingly bearish. For starters, NKE's 10-day put/call volume ratio of 3.60 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranked in the 100th annual percentile, meaning puts had been bought to open over calls at an extraordinary pace.

Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) ranked in the 84th percentile of its annual range, pointing to an unusual put-skew among short-term traders. A capitulation from some of the weaker bearish hands could create fresh tailwinds for Nike.

As expected, NKE stock began to rally off support, and gapped higher in mid-November after the company hiked its dividend payment. When Nike shot to a two-year high on Dec. 12, we recommended that options traders take partial profits by closing half of their position. A round of upbeat analyst notes in subsequent sessions pushed the security even further up the charts, allowing subscribers to close their positions ahead of expiration at a 187% profit.

 nke stock daily chart

 

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