Using options to bet on a Nike turnaround as earnings loom

Published Thu, Jun 27 202410:19 AM EDT

Since forming a "death cross" in February — when the 50-day moving average crossed below the downward sloping 200-day moving average — Nike has underperformed the consumer discretionary sector and the S & P 500. Nike, which reports earnings after the bell Thursday, is trading at less than 24 times forward earnings. That's well below the longer-term average of about 29 times forward earnings. On Wednesday, Nike traded more than two times its average daily options volume. Calls outpaced puts by more than 20,000 contracts, as has been the case on average over the past 20 trading days. The most active call options were the September 100 calls, 8,000 of which traded at an average price of around $3.22. The second most active option, trading over 5,000 contracts, was the July 5 107 calls expiring at the end of next week, roughly 15% out of the money. The at-the-money straddle implies a nearly 8% move higher or lower by tomorrow's close. NKE .GSPD YTD mountain NKE vs S & P and consumer discretionary sector YTD So, what are investors expecting? After recent sales growth declines, the average analyst estimate anticipates a modest 0.7% increase in fiscal Q4 revenue — with North American sales contributing a 2% gain, China 1.3%, Asia-Pacific and Latin America 3%. Europe, Middle East and Africa is expected to decline 1.3%, according to Bloomberg. LSEG data is not even that optimistic, expecting a negligible 0.2% increase from the prior year to $12.85 billion Even my family has contributed to to one of the reasons the company is trading at a discount to its historical valuation: loss of market share. According to YipitData, which tracks sales data noted that at Dick's Sporting Goods, On Holding brand market share grew to 12% and Hoka to 13% as of May, while Nike's slid by 7 percentage points from 39% to 32%. Declining sales (inflation-adjusted) and market share, leading to declining investor confidence, explain the lower-than-average historical multiple. The company and some investors have suggested the upcoming Paris Olympic Games could reinvigorate sales. While that may provide additional visibility, it's not clear to me how Air Jordans will benefit from a swoosh on an Olympian's jersey. The trade For those inclined to make a bullish bet, hoping market share losses will slow and sales growth will resume while taking advantage of the below-average multiple, consider a diagonal call spread, preferably with the longer-dated option capturing not only the upcoming earnings, but the subsequent earnings. For safety, I would suggest October expiration or beyond. Here's an example : Buy the the longer-dated October 95 calls Sell the July 102 calls to offset a portion of the cost All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.