After a bullish earnings report in December, Nike stock notched a weekly gain of 2.5% ahead of its upcoming earnings report. Volume was the heaviest for an up week since Nike stock surged nearly 10% during the week ended Dec. 23.
Nike (NKE) is on the earnings calendar along with Roger Federer-backed On Holding (ONON), which is on the Leaderboard Watchlist.
After hitting a high of 131.31 in early February, Nike stock pulled back in light volume. It’s been moving sideways below its 50-day moving average as it forms a flat base. A decisive move above the 50-day line would be enough to break Nike stock out of its downtrend.
Nike Stock Bides Time Ahead Of Results
Nike gapped up on Dec. 21 after investors found plenty to like in its quarterly report, including a big revenue beat. Adjusted profit of 85 cents a share was up 2% year over year and well ahead of the Refinitiv consensus of 64 cents. Revenue jumped 17% to $13.3 billion, nicely above the $12.57 billion consensus.
Inventories were up 43% to $9.3 billion but that was below $9.7 billion in the prior quarter.
Revenue at Nike’s direct-to-consumer business jumped 16% to $5.4 billion. Revenue in China totaled $511 million, down 10%, but North American revenue hit $1.5 billion, up 21%.
Results are Tuesday after the close. The Zacks consensus estimate is for adjusted profit of 51 cents a share, down 41%. Revenue is expected to rise 5% to $11.37 billion.
On Holding Set To Report
On Holding soared Thursday, helped by a Wedbush upgrade to outperform from neutral. Telsey Advisory Group maintained an outperform rating with a 30 price target. ONON stock soared more than 5% in strong volume and closed above all of its key moving averages. A decisive move its recent high of 23.06 would be enough to break ONON out of its latest downtrend.
Results from the Switzerland-based provider of footwear and sports apparel are due Tuesday before the open. The company has delivered triple-digit earnings growth over the past three quarters. Over the past eight quarters, revenue growth has ranged from 42% to 110%.
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Fund ownership has risen for three straight quarters. At the end of last year, Fidelity Contrafund owned nearly 8.3 million shares.
ONON is expected to report adjusted profit of 6 cents a share, reversing a year-ago loss, with revenue up 38% to $287.1 million.
Other earnings reports to watch include China-based PDD Holdings (PDD), which has managed to sidestep the harsh selling in other China stocks like Alibaba (BABA) and JD.com (JD).
PDD, also known as Pinduoduo, operates an agricultural e-commerce platform in China. Results are due early Monday. Revenue is expected to increase 39% to $5.93 billion. That would halt three straight quarters of accelerating growth.
Meanwhile, a couple of solar stocks have come under heavy selling pressure ahead of results. Canadian Solar (CSIQ) reports early Tuesday. Array Technologies (ARRY), which delayed its earnings report one week, reports Tuesday after the close.
Options Trading Strategy
A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a call option trade recently looked like for Nike stock.
First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.
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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price.
You earn profits when the stock falls below the strike price with a put option.
Check Strike Prices
Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.
Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.
Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.
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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.
Nike Stock Option Trade
Here’s how a recent call option trade looked like for Nike.
When Nike stock traded around 120.47, a slightly out-of-the-money weekly call option with a 121 strike price (March 31 expiration) came with a premium of around $4.90 per contract, or 4.1% of the underlying stock price at the time.
One contract gave the holder the right to buy 100 shares of Nike stock at $121 per share. The most that could be lost was $490 — the amount paid for the 100-share contract.
When taking the premium paid into account, Nike stock would have to rally past 125.90 for the trade to start making money (121 strike price plus $4.90 premium per contract).
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight
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