The last trade I posted for Nike Inc (NYSE:NKE) was successful. I sold puts to buy shorter-dated calls. Both sides were profitable thus created pure profit.
Today I can reset for another run at it. Since then, NKE stock has had a mini correction, so from here I want to cautiously go long the stock. I will sell risk against levels that I don’t think it will test.
Technically, NKE warned in late August of a downside scenario. Upon losing the ascending trend line, which was around $58.50 per share, Nike stock fell another 2%. Now it sits close to an important pivot point.
It recently has had a few negative mentions, so I also have to acknowledge the risk of more downgrades to come. Analysts tend to follow each others’ ideas. There are too many analysts with an outperform or buy ratings on NKE stock to ignore this fact.
Also technically, NKE failed to fill its upside potential of the breakout it had recently.
The level just below current price is important. It has served as support at least six times and three other times it was pivotal, so it’s important to hold here or risk testing $54 per share.
Click to Enlarge Fundamentally, the company still dominates its field. This NKE stock fall is more representative of an industry valuations and not too specific to NKE itself.
Also the retail sector exchange-traded fund SPDR S&P Retail (ETF) (NYSEARCA:XRT) has had its fair share of challenges in 2016.
NKE’s 26 price-to-earnings ratio, while not cheap, it isn’t too inflammatory. Assuming that this behemoth’s stock will soon find footing, I can cautiously initiate a bullish trade using the options market, where I can build myself a buffer zone between current price and my risk level.
NKE Stock Trade Idea
The Trade: Sell NKE Jan $50 put. This is a bullish trade for which I collect $1.31 per contract. I only sell naked puts if I am willing and able to buy the stock at the price of my strike.
If the stock falls below my strike, I may be forced to buy the stock at that price, so I would accrue losses starting at $50 per share in this case. My breakeven price is $48.69 per share.
However, selling the $50 put leaves me with a 10% buffer from current price. So NKE stock would need to fall another 10% to reach my sold put. Furthermore, I am not obliged to hold my position through its expiration. I can close it at any time for partial gains or losses.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and StockTwits at @racernic.
