Just Do It … or Not

Nike (NKE) reported earnings on Monday that beat on the top and bottom lines. But many were not impressed, citing disappointing gross margin guidance, among other metrics. The stock was hit with a slew of target price downgrades, though that’s been the norm for all stocks as analysts make feeble attempts to catch up with the bear market. Nevertheless, saying analyst reactions were mixed would probably be an overstatement. The stock reacted by crashing to a two-year low and falling 45% from its November high. Given the current market environment and the latest numbers, it’s difficult to make a bullish case for the stock over the near term. So, we won’t. That said, we’re giving plenty of room on the upside, using a call spread with the short call sitting just below the declining 20-day moving average (red line), which twice rebuffed rally attempts in June. The 50-day moving average (blue line) is also in play as potential resistance.

If you agree that NKE will continue its overall downtrend, consider the following trade that relies on the stock staying below $110 (green line) through expiration in seven weeks.  

Buy to Open NKE 19Aug 115 call (NKE220819C115)
Sell to Open NKE 19Aug 110 call (NKE220819C110) for a credit of $1.05 (selling a vertical)

This credit is $0.02 less than the mid-point of the option spread when NKE was trading at $101. Unless the stock drops quickly from here, you should be able to get close to this amount.

Your commission on this trade should be no more than $1.30 per spread.  Each spread would then yield $103.70. This trade reduces your buying power by $500 and makes your net investment $396.30 ($500 – $103.70) for one spread.  If NKE closes below $110 on August 19, both options will expire worthless and your return on the spread would be 26% ($103.70/$396.30).