Except for a handful of chosen few, Wall Street has hated retail stocks for a while. The retail sector exchange-traded fund SPDR S&P Retail (ETF) (NYSEARCA:XRT) has had a few good runs but they were quickly followed by sizable selloffs. Nike Inc (NYSE:NKE) stock is almost out of the hole it dug itself last fall. The last few months have been good to NKE bulls.
Traders tend to over-react. They overshoot on selloffs and overreach on rallies. Somewhere in the middle lies the truth.
Fundamentally retailers are challenged, but not as much for those with proprietary products like Nike stock. As long as the consumer is spending, NKE stock should do well regardless of where customers buy their products. So this makes Nike tied more to the currently optimistic macro environment than to the retail woes.
Click to Enlarge Technically, Nike stock has had a good run, so buying its shares outright is a risky proposition. Instead, I will sell downside risk against value levels with plenty of support in between.
NKE Stock Trade
The Bet: Sell the NKE Oct $47.50 naked put for $1 per contract. If NKE falls below my strike I have committed to buying at $47.50 even if it falls lower. My breakeven is $46.50 per share. In this worst case scenario, I would have bought Nike stock at a 16% discount from current levels.
Usually I like to hedge my bets by selling opposing risk. In this case I will opt out for now. I am confident that the time until expiration is long enough, allowing me to manage the risk if necessary.
I realize that selling puts can be risky and is not suitable to all. So I can modify the NKE trade into a credit put spread to moderate its risk profile. The spread will have a smaller absolute profit, but will eliminate the open-ended risk.
The Alternate: Sell NKE Oct $50/$47.50 credit put spread for 41 cents. If successful, this trade would yield 25% on money risked. Both trades have at least an 85% theoretical chances of success.
I am not required to hold these trades open through expiration. I can close them at any point in 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.