Shares of athletics giant Nike (NKE) are up about 1.35% in front of tonight’s earnings release. While stock traders appear to be positioning for better-than-expected results or maybe just a better-than-feared forecast following last quarter’s technical swan dive of -9%; the action in the option pit suggests the bulls offensive play likely maintains a limited risk defensive line such as a put.
Puts in the front month are outpacing calls by a margin of about 1.5-to-1.0 intraday on stronger-than-expected but not over-the-top activity. As well, premiums are bid back up to levels mostly matching last quarter’s report in the high 30s which are statistically high and well-elevated compared to their normal trading range values. In total, the general observation is downside protection and / or outright bearish speculation is a popular trade today.
The downside of this type protection is traders can and should expect an overnight volatility crunch in those calls and puts once tonight’s uncertainty is priced in and out of the picture. Shown below in Figure 1 is the implied volatility for the July contract which is back at its three month and very brief highs.
Figure 1: Nike (NKE) Implied Volatility Front Month
Based on the at-the-money July 82.5 straddle value of 38% IV, with 17 days until expiration, traders selling the non-directional volatility spread are estimating a roughly two-thirds chance or 1SD that shares of NKE will remain within 8% thereabouts of current levels or between roughly $89 and $75.75 come expiration.
"Just Do It?" For faster money types, the collection process barring an outsized gap will begin tomorrow. Ideally and for the pros taking the other side of the protection bet, if shares were to open up near unchanged implieds should see a conservative cut of 30% lopped off current levels with no negative directional repurcussions to boot. Kaaa-ching!
Figure 2: Nike (NKE) Weekly Bear Flag
For a short July straddle a crush in implieds would amount to about $170 per spread held, which is thought rather attractive. Furthermore and priced for $5.65, expiration breakevens of $76.85 and $88.15 look sufficiently wide on the weekly chart in Figure 2 in relation to price movement of the past couple months and including last quarter's earnings fallout.
The generous premium allows for a full-fledged and decidedly atypical retest of March’s post report fallout and leaves plenty of room for bulls to rally shares without any negative consequences for the short straddle. Net, net—it’s not a slam dunk for premium sellers, but without making any recommendations, I see today's option advantage going to that special kind of non-directional, premium short selling bear.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.