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Hey everybody, JD here with your Rational Trader Market Analysis daily.
Today, we’re back with the Mean Reversion Cash Machine, and the name on deck is Nike (NKE). They report earnings after the close, and the setup is worth taking a closer look at.
Nike’s Setup
Nike has been trading well below its mean for the last month. Day after day, the stock has tested the level that’s about two standard deviations under its average as it continues lower.
Quick refresher: a standard deviation is a statistical measure of how far something has drifted from the norm.
When a stock is two standard deviations below average, it’s stretched to a point that historically doesn’t last long. I always like to compare it to a rubber band that’s been stretched and is just ready to snap back into position.
That’s exactly the kind of setup we want for a mean reversion trade.
The Trade Structure
Here’s the trade I like:
- Sell the $65 put expiring Friday
- Buy the $62 put for protection
This is a put credit spread. You collect premium by selling the strike closer to the current price and spend a little of it to buy the strike further away, which acts as insurance. The net effect here is about 50 cents per contract in premium collected.
For that short $65 put to lose, Nike would have to drop more than 6% by Friday. That’s not impossible, but it’s unlikely for a brand like Nike unless the report is truly disastrous.
Why I Like It
The case for Nike is pretty straightforward.
- The stock has already been beaten down for weeks.
- Much of the bad news is already priced in.
- Some of the macro noise — like tariffs — has started to fade as an issue.
So even if Nike doesn’t post a blockbuster report, the odds of a sudden 6%-plus crash are slim. On the flip side, if results come in even decent, the stock could move higher or at least hold steady, and the puts we sell expire worthless.
Wrapping It Up
So here’s the play:
- Nike reports after the bell.
- The stock has been stuck two standard deviations below average.
- Selling the $65 put and buying the $62 put takes in about 50 cents.
- For the spread to fail, Nike would need to crater 6% or more on earnings.
That’s another clean Mean Reversion Cash Machine setup. Defined risk, a strong cushion, and the math working in our favor.
This is JD — good luck, and I’ll see you tomorrow.
Talk soon,
JD
The Rational Trader
P.S. Don’t forget to join me on my FREE Telegram channel for faster access to these videos, trade ideas and more.
