Nike Iron Condor – Live Trade – Entry 3/29/2017

Nike Iron Condor – Live Trade – Entry 3/29/2017

Hey Option Boxers! Jeff here to discuss a live trade on NIKE but before I do I’ll give a quick 1-2 about the company.

Company Overview

I like Nike. I purchase, wear, own, and eagerly promote their products to all my friends. I’m a consumer and a fan of their brand and I don’t think I’m alone because Nike has been around since 1964. Should sports in America or around the world continue to rise in popularity, Nike will thrive as the leading provider of athletic apparel and footwear.

Nike Fundamentals
Nike Fundamental Data for year ending 2016

Current Financial Ratios for Nike (Ticker: NKE)

ROE – 30.12%

ROE is a measure for shareholder return from their investment. At 30%, most anyone will tell you this is a superior mark.

ROA – 19.58%

Basically a number to highlight how well management is using assets. With Nike increasing ROA each year this shows me they are indeed utilizing assets well.

Net Profit Margin – 11.58%

Net Profit Margin(NPM) is exactly what we all know, it measures whether a company is profitable after all obligations are met. In this instance, Nike has improved NPM over 2015 by nearly 8%. In truth, the number above is a yearly figure, the quarterly figure for Q1 2017 is even better at 13%.

Leverage (Assets/Equity) – 1.55

A measure to indicate the degree to which the company finances assets with debt or equity. By itself the measure is virtually meaningless but when compared to itself Nike is only slightly above their 2015 mark and very much inline with the last 5 years.

Current Ratio – 2.80

A liquidity ratio to determine how able Nike is to pay their obligations. At this level and without considering other factors Nike appears in line with expectations

Debt-to-Capital – 14.08%

Gives me a quick glance for comparison of company debt. Under Armour currently has a DTC ratio of 28 and by that comparison Nike is a lower risk investment at this time.

So, why have I elected to share with you these particular measurements? Well, because with an understanding of these levels you can quickly “fundamentalize” a company and gain a feel for any potential weaknesses. Assuming of course, share price rises when the company performs well.

The truth is…I spend very little time analyzing a company fundamentally… here’s why…

——————————————————ANSWER——————————————————

  1. Because I believe the accounting practices at most large firms are heavily manipulated. Not necessarily illegal, just manipulated to show the best possible story.
  2. Because a company can have sound fundamentals and still face a declining share price.

————————————————————————————————————————

Continuing on…

To identify said weaknesses, I typically look at the current ratios (not just the actual current ratio) and compare them with previous years or quarters or even other similar companies. If something seems particularly weak or strong I’ll investigate further to determine if that could translate to the share price.

-Sidenote – Make sure the companies you’re comparing are of similar size and industry. Otherwise you’ll have to scrub the data to level the playing field vs. whichever competitor you wish to compare.

“These ratios give me a quick glance of cash reserves, debt practices, and corporate revenue.”

These ratios are some of the better known ratios but there are plenty more that could shed light on additional corporate well-being. You’ll simply need to determine what it is you want to know and from there identify the ratios that provide that information. I prefer these ratios because it gives me a sense, very quickly, of how much cash the company has available, their debt usage, and profitability.

 

Live Trade Analysis

With no glaring weaknesses in the fundamental data I’ll of course turn to technical analysis to identify my trade. I’ll discuss my rationale momentarily, but first have a look at the chart for Nike.

Nike Chart March 29th, 2017
Nike Technical Analysis

Here is what I see from this chart. I understand someone may have a different opinion but I hope this provides some value.

Factors supporting the Iron Condor

  1. The dashed blue lines are simply midlines between the most recent price extremes. Currently acting as resistance.
  2. The solid yellow lines are the breakeven lines for the iron condor strikes I selected. They can be ignored for now.
  3. Price is trading almost precisely in the middle of the most recent price swings. These levels could be valuable support and resistance areas. Consequently they align well with the breakeven lines of this strategy.
  4. Percent B neither overbought or oversold.
  5. RSI neither overbought or oversold.
  6. MACD trading near the zero line and flattening.
  7. Price trading in line with both the 10 and 30 moving averages.

Factors against the Iron Condor

  1. Volatility is low. So I’ll have to trade tighter strikes to receive the amount of premium I require.
  2. Tighter strikes result in a lower probability of success.

 

Nike May Option Chain
Nike Option Chain
May 19, 2017 Expiration

Ideal Trade Requirements

  • Minimum credit received should be 50% or more of the strike width.
    • For example; a $2.50 wide Iron Condor should receive at minimum $1.25 in premium.
    • Doing this one simple trick will increase “pot odds” to 50/50.
  • Relatively high volatility.
  • Equal premium on each leg of the Iron Condor.
  • 30-60 days to expiration
  • No upcoming earnings or Dividends

 

Actual Live Trade Parameters

Nike Iron Condor Live trade
Nike Iron Condor Order Entry

You can see I’ve met the basic requirements;

  • I’ve received slightly above 50% of the strike width in premium.
  • The trade is within 30-60 days to expiration
  • No upcoming earnings or dividends.

 

Rationale

I elected to place this trade based on the factors listed above. However, I would have really preferred an elevated volatility trade as this usually makes trading the Iron Condor strategy much easier. As volatility declines the trade becomes more profitable without any regard to price. I would have also preferred to have equalized the amount of premium received on each side of the trade but this is the real world and sometimes things just don’t match up perfectly.

 

Current Sentiments

Moving forward I’ll provide any updates to the live trade here. I’ll also provide closing images and a discussion for the trade once it becomes final. I’ll hope to avoid adjustments to the position but if required I’ll allow myself, at maximum, one opening adjustment. Should that fail I’ll consider options at that time for accepting the smallest possible loss.

Profit target – 50% of premium received.

  • Profit target – $.63 or $63.00

 

Closing Order

Well, its all over. After 28 days I’ve closed my Nike iron condor trade for a nice profit. My profit target was $63.00 and I closed today for a $57 profit before commission, $45.00 after. Either way a successful trade and one I’m happy with because it required no additional work earning a profit.

I elected to close the trade just shy of my initial profit target for two reasons;

  • Volatility collapsed to near zero (highlighted below)
  • Price was near perfectly in the middle of Iron Condor P/L graph. (Basically, any price move up or down will hurt my profit)

Practically tying my hands together. I either have to commit all in for max profit or close now. Of course, I elected the later to avoid additional risk.

But why were these the best two options?

Let me explain. When setting up an iron condor you want elevated volatility levels so the trade can be initiated at a higher premium. Then, as volatility declines, so does the iron condor’s value. In this scenario, the trade had reached volatility ground zero and only losses will result moving forward, as volatility rises.

Additionally, price was trading near perfect center of the iron condor bracket. Further supporting a close of the position as any price move from this point will likely snatch profit I’ve earned, at least in the short term. Holding the trade until expiration may overcome this problem but it just didn’t seem worth the risk.

In the end this live trade was a successful one, as is evidenced in the images below. If you have any questions feel free to comment or reach me via the contact page.

 

Closing Nike Live Trade 4-24-17
Closing Nike Trade originating 3/29/17

 

Nike Live Trade Verification Scree
Nike Live Iron Condor Trade Proof

 

Happy trading,

Jeff “the OptionBoxer”

 

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