Nike Inc (NYSE:NKE) is in trouble, and it may take more than a Santa Claus rally and the holiday shopping season to save the shares. Year-to-date, NKE stock is off more than 20%, with the shares down some 17% from their August peak near $60.
And yet, despite this poor Nike stock price action, the shares are surrounded by a wealth of bullish sentiment on Wall Street. As contrarian investors know, poor price performance plus bullish sentiment can lead to further losses.
Nike Stock Chart
Click to Enlarge Starting with a look at NKE stock sentiment, we find that no one in the brokerage community is anticipating a continued decline for the shares. According to data from Thomson/First Call, 21 of the 32 analysts following Nike stock rate the shares a buy or better, with not a single sell rating to be found.
Furthermore, the 12-month consensus price target of $60.13 represents a hefty premium of about 20% to yesterday’s close.
This wealth of optimism amid NKE stock’s continued decline opens the door to potential downgrades or price-target cuts if the holiday shopping season does not tilt in Nike’s favor.
There are signs of shifting sentiment among short sellers, however. During the most recent reporting period, the number of NKE shares sold short jumped by 4% to roughly 27 million. What’s more, the number of shorted shares of Nike stock have risen steadily from for the past three months, from less than 25 million shares sold short in early September.
Should this trend toward short selling NKE stock gain momentum, it could provide additional headwinds for the shares.
Options traders, meanwhile, have thrown in heavily with the bulls in the brokerage community. Specifically, the December put/call ratio currently rests at 0.34, with calls nearly tripling puts among options set to expire before the end of the year. This ratio has plummeted from its perch near 0.93 in September, a development that should be disconcerting due to the fact that NKE stock has dropped sharply throughout this rise in optimism among speculative traders.
Looking ahead to next month, Dec. 16 series implieds for NKE stock are pricing in a potential move of about 4.9%. This places the upper bound near $52.67, while the lower bound lies at $47.75 from Tuesday’s close.
From a technical perspective, the upper bound lies well short of overhead resistance at Nike’s 50-day moving average, while the lower bound pushes NKE stock toward its August 2015 lows.
2 Trades for NKE Stock
Put Spread: Weak price action, rising short interest and a wealth of bullish sentiment from options traders and analysts doesn’t bode well for NKE stock from a contrarian standpoint. Wall Street appears to be banking on the holiday shopping season to save Nike, even though the shares failed to join in the recent Trump rally. As such, the path of least resistance appears to lie to the downside.
Those traders looking to bet against Nike over the short term might want to consider a Dec $47.50/$50 bear put spread. At last check, this spread was offered at 80 cents, or $80 per pair of contracts. Breakeven lies at $49.20, while a maximum profit of $1.70, or $170 per pair of contracts, is possible if NKE stock closes at or below $47.50 when December options expire.
Call Sell: Assuming Nike doesn’t plunge and finds buying support from traders taking their cues from the brokerage community, the shares are still set to stagnate heading into the end of 2016. One way to use options to profit from this development is to sell out-of-the-money calls — especially if you own NKE stock.
Traders taking a more neutral-to-bearish stance might consider selling the Dec $55 strike call. If you already own NKE stock, this call sell allows you to offset some of your portfolio losses in the event of continued stagnation, but also allows you exposure to any upside up until the stock trades at or above $55.
At last check, this option was bid at 8 cents, or $8 per contract. A sold call allows you keep the premium as long as NKE stock closes below $55 at expiration. On the downside, if NKE rallies above $55 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
