How to Trade Nike Inc (NKE) Stock When It’s Vulnerable

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For a long while consensus has been that the retail sector is where smart money doesn’t go. This toxicity stems from the Amazon.com, Inc. (NASDAQ:AMZN) effect on traditional retail. Nike Inc (NYSE:NKE) often gets swept up with this meme trade even when not likely deserved and I usually take advantage of temporary weakness.

How to Trade Nike Inc (NKE) Stock When It's Vulnerable

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A couple of weeks ago, even though I knew that Nike stock was technically vulnerable, I shared a bullish trade that created income of thin air. After a nice dip earlier today, I want to reload long in a similar fashion.

Fundamentally, NKE is so large that the basics don’t change much in this short a period of time. So I will continue with the assumption that the company prospects are solid and it would be reasonable to expect that management will be able to deliver close to what it promises.


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Technically, I do have to worry about the potential of losing $54.50, which has twice served as support and this would be the third test of it. If lost, it would likely invite more technical sellers and NKE stock could lose another $2 from there. This is not a forecast, but I do have to account for the possibility of it happening.

I am not a fan of chasing price or catching falling knives. At this point, NKE looks like a falling knife, so I won’t risk $55 of my money here and without any room for error. Instead I will use options for today’s bullish setup, so I can build some buffer from current levels. This is especially important since markets are at all time highs.

The Trade: Sell the NKE Jan 2018 $47.50 naked put and collect $1.50 per contract. This is a bullish trade that requires NKE stock to stay above my sold strike, so I can retain maximum gains. Theoretically I have a 90% chance of that happening thanks to a 13% buffer from current price.

Selling naked puts is dangerous. It comes with commitments as I would be put the stock at that price should NKE fall below it and I would then accrue losses below $46 per share. So for a more palpable risk profile I can change this into a credit put spread instead.

The Alternate: Sell the NKE Jan 2018 $47.50/$45 credit put spread where I still have a 90% chance of success to yield 20% on risk. Compare that with buying the stock now, risking $55 per share, and needing it to rally 20% to $66 just to match the this trade’s yield.

Selling options is risky, however, especially when markets are near all-time highs, so I only risk what I can afford to lose.

Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/how-to-trade-nike-inc-nke-stock-when-its-vulnerable/.

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