Signal Du Jour - Skew trade in NKE

First skew signal.

A preamble: I was off yesterday because I finally moved into my own place after 15 months on the road, jumping from country to country and Airbnb to Airbnb. The pleasure of writing this note from my old desk is terrific.

It is another quiet week in the equity market. The main indices whirled up and down as economic releases lazily justified portfolio rotation and positioning in anticipation of the next year.

Last week, we outlined our approach to skew trading, and today, we present our first detailed analysis, as we have an interesting setup presenting itself in NKE.

A couple of reminders: Sharpe Two is not a financial advice publication. We publish the research to the best of our knowledge; we do not take responsibility for how you will implement it. Talk about it with your financial planner.

However, for full disclosure, we put our money where our research is and trade our own signals. This will never change.

Let’s get to it.

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The context

Nike has had a difficult few months. Inflation directly translated into weaker demand from consumers who decided to focus on more essential goods. Meanwhile, competition with Adidas has intensified, and the American shoe designer has lost some significant market share. As a result, the stock is down 24% in 2024, continuing a reversal from all-time highs observed right after the COVID-19 years.

From a volatility perspective, the situation could have been worse. Currently, at 22.64, we are far from the highest of the year, observed either during the crash in August or when the company announced it would bring back the previous CEO, Elliot Hill, to try to turn things around.

Realized volatility is off its high of the year.

Next week will be the first earnings since Elliott Hill took the helm, and the market will be keen to see if the results are already improving under his watch. In the meantime, with such a gloomy picture, let’s look at the options market pricing and see if we can find some exaggerations.