Every weekend I review over 1000 charts to come up with a Top-10 list to focus on for the week. But invariably there are a few that do not make the list but carry some interest nonetheless. Nike (NYSE:NKE) was one of those stocks. Back in March I wrote that Nike -- just prior to its last earnings report -- had an impenetrable titanium lid at 100. Of course it proceeded to blow through that lid following the report. But since then it has done absolutely nothing.
Under Armour (NYSE:UA), Nike's rival, reported on April 20 I’m hard-pressed to see any impact on Nike's chart. Under Armour has just moved lower, but Nike just keeps moving sideways, tightening around 100.
What do you do with a stock like this? One answer is nothing. Just watch for it to show you whether it wants to move up or down and then put on a position. If you own the stock already, then you can add a collar to protect against a move lower. Or, if you're savvy, you look to the options market.
The consolidation in the chart tells a story, but there is more to it. The Bollinger Bands® are very tight. How tight? They have not been so taught in over 4 and a half years. And that's often a signal that a big move is about to happen.
Of course the question is, which way will it go?
This is where the options market comes in. The weekly 100 Strike Straddle expiring in 3 days can be sold for $1.40. That suggests that market makers believe the price will stay between 98.60 and 101.40 by Friday. If you sold that Straddle, then you could use the proceeds to by a longer-dated June 12 Expiry 100 Straddle. That one would cost about $4.15; but by selling the weekly Straddle, your cost is only $2.75.
To be profitable, the price by the June expiration needs to move by $2.75 more than it moves by this Friday. So if it closes at 100.50 Friday, then it would need to close over 103.25 by June. But if you capped your gain in June by selling the 95/105 Strangle for $1.00, your total cost is only $1.75, which lowers the required additional move in June by $1 to $1.75.
So, do you think the price of Nike will stay close to 100 this week and move out of these tight Bollinger Bands by June 12?