I mentioned in my weekly post, Top Options Plays for the Week, that Nike (NKE) offered a potential earnings trade next week.
As I’ve stated in the past, I hope that by going through a few examples of various options strategies every earnings season we can start to build a solid foundation on how to appropriately apply options selling strategies with a focus on high-probability trades.
Today I’m going to focus on Nike (NKE).
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The company is due to announce after the closing bell on March 21. I’m going to go through a risk-defined strategy and an undefined risk strategy taking a high-probability approach. I hope this continues to be a helpful exercise for not only trading around earnings, but also for using similar strategies using various timeframes (expiration cycles).
Here is how Nike has performed immediately following earnings dating all the way back to March 21, 2007.
Image courtesy of Slope of Hope
As you can see, Nike has a recent history of being volatile from time to time when its earnings are released. But that’s OK—it’s always good to see what a trade is offering us, particularly one that might seem a bit more aggressive given Nike’s history around earnings. But if the premium and probabilities make sense, well, we might have a nice opportunity at hand.
Let’s take a closer look.
Iron Condor Earnings Trade in Nike (NKE)
Nike (NKE) is due to announce after the close Monday. So, let’s take a look at a potential trade using a risk-defined options strategy like an iron condor.
The stock is currently trading for 126.33.
The next item is to look at NKE’s expected move for the expiration cycle that I’m interested in.
The expected move or expected range over the next eight days can be seen in the pale orange colored bar below. The expected move is from 116 to roughly 137, for a range of $21.
Knowing the expected range, I want to, in most cases, place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 116 to 137.
This is my preference most of the time when using iron condors.
If we look at the call side of NKE below for the March 25, 2022, expiration, we can see that the 140 call strike offers an 85.70% probability of success. So, for this example, I’m going to sell the short call at the call strike and define my risk with the 145 call strike. By choosing the 145 call strike to define my risk, I know that there less than 10% chance that NKE will push above 145 prior or at expiration.
Now let us move to the put side.
Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 116. The 111 put strike, with an 85.27% probability of success, works as our short put strike. I’m going to stick with a 5-wide spread on the put side as well so the 106 put strike will define our probability of success on the downside. The 106 put strike has an 91.47% probability of success. This means there is less than a 9% chance of taking a max loss on the trade.
We can create a trade with a nice probability of success if NKE stays between our 29-point range, or between the 140 call strike and the 111 put strike. Our probability of success on the trade is 85.70% on the upside and 85.27% on the downside.
I like those odds. But do I like them enough to take the trade?
Here is the trade:
Simultaneously:
Sell to open NKE March 25, 2022, 140 calls
Buy to open NKE March 25, 2022, 145 calls
Sell to open NKE March 25, 2022, 111 puts
Buy to open NKE March 25, 2022, 106 for roughly $0.95 or $0.95 per iron condor
Our margin requirement is $405 per iron condor.
Return on the trade is 23.5%.
Again, the goal of selling the NKE iron condor is to have the underlying stock stay below the 140 call strike and above the 111 put strike immediately after NKE earnings are announced.
Here are the parameters for this trade:
- The Probability of Success – 85.70% (call side) and 85.27% (put side)
- The maximum return on the trade is the credit of $0.95, or $95 per iron condor; that’s a 28.2% return per iron condor
- Break-even level: 140.95 – 110.05
- The maximum loss on the trade is $405 per iron condor. We always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.
But before I pull the trigger, let’s take a look what our margin of error is on the upside and downside.
With NKE currently trading for roughly 126.33, our short 140 call strike is roughly 14 points away for an 11% margin of error.
On the downside, our short 111 put strike is also roughly 15 points away, for a 12% margin of error.
As for NKE’s current IV rank?
Take a quick look at the chart above and you can clearly see we are experiencing some of the best premium in years.
Nonetheless, a trade in NKE, particularly with the recent market price action, is not for the faint of heart. But with a decent IV rank, good premium and an opportunity for a high-probability trade with a nice margin of error NKE will be tops on my watch list heading into next week. I will be interested to see how the premium holds up as we get closer and closer to the announcement Monday after the close.
Remember, I prefer to make these trades the day before earnings are announced, so I would expect to see the premium a bit lower than it is now due to decay. So, premium could be an issue at the time of the trade. But I like to see where potential trades stand the week prior, so I have a good understanding what stocks look appealing for a potential trade around earnings, which is why I go through this exercise with the stocks on my weekly earnings watch list.
As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Newsletter for education, research and trade ideas.