×

Smart options trade protects Nike bull

Nike's earnings announcement disappointed investors, but one trader who got bullish on Wednesday probably isn't too concerned.

In Wednesday's session, one trader sold 1,300 88-strike puts expiring on Jan. 30 for about $1.50. That's a bullish trade, but not aggressively bullish, as the trade will only lose money if Nike shares close below $86.50 on Jan. 30. That's considerably below Wednesday's closing price of $94.50.

The trade was made ahead of Nike's Thursday earnings announcement. Even though the company ended up beating earnings and revenue expectations in that report, Nike reported disappointing future orders numbers, which sent the stock a bit lower in late trading.

Read MoreNike earnings beat; shares slide on future orders

However, because the 88-strike where the put was sold is still well below the $93 level the stock bounced off of in the after-hours, there appears to be little risk that the trader will not end up getting to keep the $1.50 per share collected.

Kirstin Sinclair | Getty Images

That makes this trade a good example of why one rarely loses money selling out-of-the-money short-term options.

Of course, the trade-off is that the one time a trader does lose money, it can get ugly. This make for highly asymmetrical risk/reward relationships. For instance, here the trader collected $195,000 by selling these options. But in the incredibly unlikely scenario in which the stock goes to zero by the end of January, the trader technically stands to lose $11.5 million.


Follow the show on Twitter: @OptionsAction.

Latest Video

Tutorials

Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Options Action Traders

From Our Sponsor

Options Action Newsletter:

Sign up to receive exclusive Options Action content. Each month you'll receive an exclusive message from host Melissa Lee and insight directly from one of the members of our Options Action panel. Keep your pulse on the market with the Options Action newsletter.

Please enter a valid email address
To learn more about how we use your information, please read our Privacy Policy.