NKE Just Trade It

[ This post includes a valuable personal options trading technique]

Today is 5/30/21. On Thu 5/27/21, near the market close, I noticed a strong bullish setup on NKE. What was bullish was:

• Trend Kicker candlestick pattern
• on higher than usual volume
• Gartley pattern
• Close above the 8ema
• Close above all MA's
• Breakout through the downward Trend Line
• Retest of the Trend Line
• Close above the Trend Line
• Stochastics not overbought

I used an options trick I figured out years ago, although I'm sure I'm not the first. The genesis was I wanted to short option Theta time decay, but I don't like shorting option vertical spreads because you must risk substantially more than your possible reward. So, after musing about it for a while, I came up with an idea to short Theta by going long an option vertical spread (hereinafter just "spread"). This may sound crazy at first but I've done it many times and it works.

Think about this. A spread that is fully In-The-Money (ITM) before expiration is not valued at the full spread width because there is still premium (extrinsic value) in the options. But the spread will reach its full value of the spread width at expiration because there is no more premium at expiration. That means an ITM spread will increase in value from a time before expiration to the time of expiration.

Now, add to this, you want the Theta time decay to be at the greatest rate (fastest) possible. The closer to expiration you get, the faster the decay. 

So, putting this all together, what you can do is buy an ITM spread, or near ITM, that you believe will be ITM at expiration, and buy it the day before, or day of, expiration. Then watch the spread magically increase in value to the width of the spread. I've done this many times and it works, assuming you were right about the spread being ITM.

Here is what I did for this Nike trade. I noticed a strong bullish pattern on a Thursday 5/27/21. At 15:56 ET, 4 minutes before the market close, I bought a NKE May 28th 135/137 Call Spread for 1.36. NKE stock was 136.75 at the time. Only 25 cents shy of fully ITM. Since the bullish setup was strong, I was confident the spread would expire ITM the next day.

On Friday 5/28/21 NKE opened and continued north. I was feeling pretty good about this trade. But then, it turned around and started heading down. I expected it to bounce off the TL and continue back  upward, which is actually a very bullish pattern. However, the spread is expiring today and we may not get a bounce today. So, I figured the best thing is to capture what profits were available before I'm in one of those situations where you're right but lose money.

So I sold the spread for 1.86, capturing a profit of 186-136=$50 per spread. What happened here was that I profited from Theta time decay by going long a spread rather than shorting a spread.

What Now?

OK, so that was Friday. Now I have no position but I still believe if we make a new high then Nike is going significantly higher. 

I entered today (Sunday 5/30/21) a conditional order to go long if we exceed the previous swing high at 138.31:

Buy Good-Til-Cancel Jun 18th monthly 140/145 Call Vertical Spread at the Bid/Ask midpoint if NKE >= 138.50.

For a target, notice the D point of the AB=CD is 145.62, and the 1.618% Fibonacci Extension of the Gartley (setup between  labeled points A and C where A is a Gartley X and C is a Gartley D) is 147.82. Gartley type pattern is also known as XABCD. Given these likely objectives, I picked a conservative target of 145.

The maximum risk is the cost of the option, which I estimate at $220 by using a 135/140 spread as a proxy.

If we assume we'll hit our target near expiration, then the reward will be approximately the $5 wide spread width. It'll more likely be something less, so let's say $4.80.

R:R = 480/220 =  2:1, very nice.