Nike Trade Into Earnings with Options

• Posted by Greg Harmon
• on September 22nd, 2011

Nike ($NKE) is getting hit just like every other stock but it reports earnings Thursday night after the market closes. This catalyst makes it worth taking a look at a trade on the stock. First let’s look at the technical set up. The weekly chart, shown below, has good support around the 79 level in the

year long consolidation phase. Notice that the Relative Strength Index (RSI) has not turned bearish since March 2009, holding over 40 even on the March earnings breakdown. Now turn to the daily chart below. I’ve outlined the rough channel it has traded in since October between 79 and 91 in red. It rejected at the top of this range just a couple of days ago, with very strong technical

support prior to the move lower, along with the market. Notice also the support from March in the 75 area and the stretch of trading activity between 70 and 75 from May through September 2010. These should provide support if it falls outside of the channel. Now adding the view from the options with the sell off Thursday morning, there is a trade idea.

Buy Call Spread Risk Reversal with October 85/90 Call Spread and Short October 75 Put

The combination, long the October 85 call and short both the October 90 call and October 75 put, was offered at 41 cents as I wrote this. This trade is profitable at expiry above 85.41 and if at expiry the price is above 90 you keep a $4.59 profit. It is also protected down to 75, 10% below current levels, with a maximum lose above 75 of 34 cents, the premium paid. Below 75 you will be put the stock if you remain short through expiry. Once entered this should be looked at as two trades: A call spread and a short put. Set your profit targets accordingly. I often will accept $3.50 on a $5 call spread if it has two weeks or more remaining and get more aggressive the closer to expiry it gets. I will be taking this trade shortly after publishing it.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.

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