Nike stock price was at $98.35 as of 11:35 AM EDT on Thursday.
Next Thursday after the close, Nike (NYSE:NKE) is scheduled to release its earnings report; an increase of about 8% is anticipated. The Nike stock declined along with the market on Thursday morning.
The Nike stock formed a bearish candle on Wednesday and is below the 21-, 50-, and 200-day moving averages. Let’s examine how we might set up an options trade based on the beliefs that 1) Nike stock will remain inside the anticipated range, and 2) the reaction to the earnings report will probably be unfavorable. We can see that the projected range is 8% by taking the at-the-money Put and Call for the September 30 expiration. More on Investor Business Daily.
Finding a bear call spread with a short strike at least 8% above the stock price is a good idea now that we know the anticipated range.
Nike Stock Trade Setup Before Earnings Report
A bear call spread would be produced by selling the 110-strike put on September 30 and purchasing the 115 put. On Wednesday, this spread was trading for about $0.50. With a maximum risk of $450, a trader selling this spread would collect $50 in option premium.
If Nike stock stays below 110 between now and September 30, it equals an 11.11% return on risk. The entire $450 is lost on the trade if the stock closes higher than 115 on the expiration date.
The bear call spread’s break-even point is 110.50, which is determined by multiplying 110 by the 0.50 option premium per contract. With such short-term trades retained over earnings, there is little room for adjustment. Assignment risk is another factor in short-term transactions.
Trade May End in Loss
Although an 11% gain on Nike stock in a short period of time would be fantastic, the risk of a 100% loss is still very conceivable. As a result, only traders with a strong tolerance for risk should use this trading strategy. Furthermore, traders should size their positions appropriately.
Traders may opt to wait for a price higher than $0.50 for the spread depending on how Nike stock moves right now. Nike stock is ranked No. 8 in its industry group by the IBD Stock Checkup, with a Composite Rating of 45, an EPS Rating of 60, and a Relative Strength Rating of 26. Please keep in mind that investing in options carries a high risk of losing all of one’s money.
Featured Image- Megapixl @ Kitleong