Nike’s (NKE) earnings beat was met with cheers on Wall Street … followed by waves of selling.
Analysts expected the apparel titan to report 86 cents per share. And that it did, and then some. NKE delivered 90 cents per share and was swiftly lifted to a new all-time high, opening at $136.24 Wednesday morning.
And then, the ultimate sell-the-news reaction began in earnest. As I type, NKE stock is currently tagging $130, and the selling pressure has yet to abate. That’s almost 5% chopped off Nike’s stock price in about an hour.
Not bad, bears. Not bad.
The magnitude of the reaction is reminiscent of the ongoing shellacking in Disney (DIS) stock after last week’s release of Star Wars: The Force Awakens.
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Adding insult to injury is the tremendous amount of volume descending on NKE Wednesday.
At its current pace, Wednesday’s activity should eclipse the volume spike from September’s earnings release, making this distribution the largest seen in years.
Not exactly what you want to see if you’re a raging bull on NKE. Be on the lookout for downside follow through in the days ahead.
Fortunately, Nike stock has yet to breach any major support levels, so there’s always a chance that Wednesday’s bout of profit taking becomes an epic one-hit wonder for the bears.
But I doubt it.
Nike Stock Replacement
Nike shareholders interested in reducing risk could consider the old stock replacement strategy here.
The basic ideas is to swap out your shares for long-term in-the-money call options. If the calls are deep enough in-the-money, they will behave similar to a long stock position but at a pittance of the cost (and therefore risk).
For example, you could sell your 100 share position of NKE stock and replace it with a July $105 call. At $130 your long stock position is costing you $13,000 and carries as much in risk.
The July $105 call, in contrast, costs $2,750; and while still offering unlimited upside in Nike stock price over the next seven months, only carries 21% of the risk.
So, again, the trade consists of selling shares of Nike stock and opening one NKE July $105 call for every 100 shares sold.
Since the call sits far in-the-money, it’s only carrying $280 of extrinsic value, so the effect of time decay should be somewhat minimal over the course of the trade.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
