Good Earnings At One Company Can Affect An Industry
There are times when news about one company affects the stocks of its competitors. This is largely because stocks tend to move as groups, especially since index funds have become giants in the market place. A move in one stock can affect its industry as stocks in the index reflect the price move.
An example of this was in display in the shoe business this week. Adidas jumped after the German sportswear giant impressed shareholders with its 2020 profitability outlook.
The company’s latest quarterly earnings report missed expectations by a small amount, but traders looked past that to see the important number in the earnings report was the change in the company’s profit margin.
Adidas Group has been telling investors it will improve its margins and is now two years into a previously announced five year plan. In the earnings announcement, the company raised its predicted profit margin to 11.5% by 2020.
The gains will come largely from an increase in in e-commerce sales. Last year, e-commerce sales increased 57%, showing strong gains in both China and the U.S.
Analysts note that “the brand’s comeback in America continues to be a win it can tout, leapfrogging Under Armour in U.S. apparel and gaining on Nike in U.S. footwear. Last year, Adidas jumped over Nike-owned Jordan Brand to reclaim the No. 2 spot in sneakers.
A Well Planned Comeback
Adidas brand sales in North America were up 35% in 2017, driven by running shoes and Originals, the line that includes retro sneakers like the Superstar and Stan Smith.”
US CEO Mark King says the group “invested heavily in North America, and it’s working.” This is viewed as success of the plan that Adidas introduced in 2016 which said the company would target key cities with speed.
Now, the company has a strong product pipeline, or the right positioning with celebrity culture, or both. “We’re really excited about the momentum of the brand, which we didn’t have a few years ago,” King says. “We have really great momentum right now.”
Adidas has taken a “Creators” angle with its sports marketing in the U.S., endorsing athletes like bearded Houston Rockets star James Harden, effusive Denver Broncos linebacker Von Miller, young Houston Astros slugger Carlos Correa, and electric WNBA star Candace Parker.
For traders, one problem with this news is that Adidas is not easy to trade for US investors. But, the news affected the industry, including industry leader Nike, Inc. (NYSE: NKE). That stock has been pulling back after an extended up trend.
Now, traders are likely to wait for more news from the industry before a big move in Nike unfolds.
A Strategy to Benefit While Waiting for the News
After the big price jump in the stock, we could see Nike settle into a trading range. One options strategy that benefits from a stock in a trading range is an iron condor. This strategy has the added benefit of carrying limited risk.
To open an iron condor trade, the investor sells one call while buying another call with a higher exercise price and sells one put while buying another put with a lower exercise price. Typically, the exercise prices of the calls are above the market price of the stock and the exercise prices of the put options are below the current price of the underlying stock.
In an iron condor, the difference between the exercise prices of the two call options will be equal to the difference between the exercise prices of the two put options. The final requirement for this strategy is that all of the options must have the same expiration date.
The risks and potential rewards of the strategy are shown in the following diagram.
Source: The Options Industry Council
The maximum gain on this trade is equal to the premiums received when the position is open. The maximum risk is equal to the difference in the two exercise prices less the amount of the premium received when the trade was opened.
Opening an Iron Condor in Nike
For Nike, the trade can be opened using the following four options contracts:
As you see, all of the options expire on the same day, Friday, March 23.
The difference in the exercise prices of the calls or puts is equal to $1.00. Since each contract covers 100 shares of stock, this means the maximum risk on the trade is equal to $100 less the premium received when the trade was opened.
Selling the options will generate $1.42 in income ($0.89 from the call and $0.53 from the put). Buying the options will cost $1.05 ($0.65 for the call and $0.40 for the put). This means opening the trade will result in a credit of $0.37, or $37 for each contract since each contract covers 100 shares.
The maximum risk on the trade is equal to the difference in strike prices ($1.00) minus the premium received ($0.37). This is equal to $0.63, or $63 since each contract covers 100 shares. Many brokers will require a margin deposit equal to the amount of risk. That means this trade may require just $63 in capital.
The maximum gain on the trade is the amount of premium received when the trade is opened. In this case, that is $0.37 or $37 per contract.
The potential reward on the trade ($37) is about 59% of the amount risked, a high potential return on investment for a trade that will be open for about one week. If a trade like this is entered every month, a small trader could quickly increase the amount of capital in their trading account.
This trade could also be closed out early to reduce the potential risks of the trade. It could still deliver its maximum gain even if the position is closed before the expiration date of the options.
The iron condor is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that should be lower than owning the stock.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.