My Failed Earnings Trade 📉
Ranked #33 in the Top Assets by Market Cap — Nike has been a household name for over half a century.
Represented by their iconic swoosh logo, Nike products can be found all over the world in all almost all countries.
Their reach has broken through sports of all popularity and have even transcended to become a major player in the streetwear industry.
Nike is by no means a small company and like many, I love trading companies that I’ve either used or am familiar with.
The Trade
Nike was set to report earnings during market close of June 24, 2021.
Like many products during the first earnings report of the year, Nike beat expectations and slowly bled to a low of roughly $125.
Since then, it’s formed a triple bottom at that level, acting as a level of support for the March “crash” and slight sell off mid-May.
Leading up until earnings, Nike had been consistently selling off forming lower lows and lower highs until the $125.
Nike then began recovering week of earnings and I decided to setup a neutral trading strategy that would help me capture minimal movement in the product.
Using a combination of the put credit spread and call credit spread, I created an iron condor placed higher than a 1 standard deviation move.
Nike was expected to have a 5%+ expected move to the downside and upside.
However, using prior knowledge on Nike’s Q1 earnings, I determined that Nike would have to miss significantly for a 1+ standard deviation move post earnings.
Using different social media platforms, I concluded that the incoming summer season and people wanting to get more active during summer wouldn’t allow that to happen.
My trade looked like this: (skewed to the upside)
- PCS on 6/25 @120p/-125p
- CCS on 6/25 @-140/145
Looking back, even though my assumption was correct, I didn’t adhere to my own rules when making trades and instead thought about making the quick buck instead of the quality buck.
My risk reward ratio was — 5:1 — meaning I was risking 800 dollars to make 200 while maintaining a probability of profit of around 80%.
All I had to do was wait and see what would happen… and oh boy was it not good 📉
The Result
Whether it be the inner demon inside me or something outside of trading that influenced this decision, I’ll never know.
But in the past, I’ve kicked myself so many times for not pulling the trigger on similar situations that turned out in the green.
However, it was this time that the snake caught and punished me… all because I traded emotionally and instead of wanting to chase losses, wanted to chase potential winners.
On June 24th market close and June 25th market open, Nike moved 3 standard deviations to the upside — triple the expected move.
The shoe giant absolutely obliterated earnings as the stock rocketed 12% afterhours.
Earnings looked like this:
- Earnings per share of $0.93 cents on $12 billion of revenue
- NA, Europe, Middle East, Africa, Asia sales — all up close to +/-100%
- Online sales continue to grow and fuel revenue — up 84% from Q1: 82%
- Claimed 300 million worldwide members in its membership program
- Sees fiscal 2022 sales topping over $50B vs. $48.5B expectations
Takeaways
My 1 SD call credit spread went instantly in the money overnight and I was down $800 in the blink of an eye.
Because this was a expiring weekly option, there was no way to roll as extrinsic value in the position was eaten away like a 5 year old’s B-Day cake.
I had to take away the loss and move on.
This was one of the first trades I made pretty impulsively as I was impatient, undisciplined, and eventually led me to slip up.
There were so many signs that appealed early on but I just ignored them.
The size of the trade, amount of risk, time until expiration — all were red flags from the very beginning.
From this excellent learning experience I learned many things that will continue to pave my trading career.
Earnings are called unpredictable titans for a reason and I have thoroughly experienced a nice 3 standard deviation move that boosted Nike’s market cap by 10s of billions of dollars overnight.
Staying away from unpredictability and sticking with core fundamentals will not only allow for consistency, but effective flow.
This “flow” will allow for a better peace mind and help increase overall performance in the long run as inefficiencies are completely flushed out.
Even though premium is temporary, always remember that collateral is forever — A sad truth I’ve happily learned 😭👍
THANKS FOR READING⚡️
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— Tristian Xu ⭐️
