Nike is set to report earnings next Thursday after the close, with an expected move of around 8%. On Thursday morning, Nike stock fell in sync with the market.
Nike stock is below the 21-, 50- and 200-day moving averages and put in a bearish candle Wednesday.
Let's analyze how we can structure an option trade that fits the view that 1) we think Nike stock will stay within the expected range, and 2) the response to the earnings report is more likely to be negative.
Taking the at-the-money put and call for the Sept. 30 expiration, we see that the expected range is 8%.
Now that we know the expected range, let's find a bear call spread with a short strike at least 8% above the stock price.
Trade Setup For Nike Stock Ahead Of Earnings Report
Selling the Sept. 30, 110-strike put and buying the 115 put would create a bear call spread.
This spread was trading for around $0.50 Wednesday. That means a trader selling this spread would receive $50 in option premium with a maximum risk of $450.
That represents an 11.11% return on risk between now and Sept. 30 if Nike stock remains below 110.
If the stock closes above 115 on the expiration date, the trade loses the full $450.
The break-even point for the bear call spread is 110.50, which is calculated as 110 plus the 0.50 option premium per contract.
There is little room for adjustment with short-term trades such as this held over earnings. Short-term trades also contain assignment risk.
Trade Could Be Total Loss
An 11% return on Nike stock in a few days would be nice, but the possibility of losing 100% is also very real.
As such, this trading style is only for traders with high risk tolerance. And traders should use appropriate position sizing.
Depending on how Nike stock trades today, traders may prefer to wait for a price higher than $0.50 for the spread.
According to the IBD Stock Checkup, Nike stock is ranked No. 8 in its industry group, and has a Composite Rating of 45, an EPS Rating of 60, and a Relative Strength Rating of 26.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
