Pre-Earnings Implied Volatility Play On Nike

| About: Nike Inc. (NKE)
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Nike (NYSE:NKE) reports earnings on December 22 after the close. The Implied Volatility (IV) of the options is still very low. The stock had fairly large moves in the last few cycles and I expect the IV to rise as we are getting closer to earnings. Below is the Volatility chart of NKE for the last 7 months:

I circled the areas of the two previous earnings. As we can see, the IV spiked about 10%-12% before the previous two earnings releases. Currently the IV is still well below the previous pre-earnings levels.

I don’t want to play NKE directionally; I just want to take advantage of the rising IV before earnings. I described the general concept here. It involves buying a strangle a few days before earnings and selling it just before earnings are announced (or as soon as the trade produces a sufficient profit). In case of NKE, I don’t expect an explosion in IV before earnings, but 10-12% increase should be sufficient. The time decay (negative theta) of the options is still not a big factor since we have more than five weeks before January expiration.

NKE is currently trading at $96.50. The trade I’m looking at is:

  • Buy January 2012 92.5 puts
  • Buy January 2012 100.0 calls

As of this writing, the trade can be done for about $4.10. You might see different prices when this article is published. Please adjust the strikes if the stock price is significantly different.

The negative theta of the trade is currently about 2%. That means that, all other factors equal, the trade will be losing 2% per day. So worst-case scenario, the trade might lose around 10%-12% before the next Tuesday. However, the rising IV should offset the negative theta. If the stock moves, it should help to increase the gains. My plan is to take the profits and roll to new strikes if the stock makes a decent move. And don’t forget to sell before earnings.

The bottom line: This trade is designed to take advantage of the rising implied volatility of the options before earnings. It is not a directional bet, it is a volatility play.

Disclosure: I own the NKE strangle.