Nike Inc (NKE) Stock Is Showing Another Sale Event for Longs

Advertisement

The long side of the retail sector has been a toxic thesis for a while. In spite of it, Nike Inc (NYSE:NKE) had a double-digit rally in February. It has since given about half of it back. Given the speed of the move in either direction, most investors are scared to wade into NKE stock.

Nike Inc (NKE) Stock Is Showing Another Sale Event for Longs

Source: Shutterstock

Even though it has fallen, neither its fundamentals nor the equity macro picture have changed of late, so I view this as an opportunity to enter long. But catching the proverbial falling knife can be costly, so I will use the options markets to allow for room for error.

Technically NKE stock is vulnerable, but at the same time, it’s also near the bottom end of a five-month trading channel. Looking at the Nike weekly chart, it’s clear that it could be coming into balance over the long term. Over $58 per share was too high and under $53 was too low, so in between lies the price balance.

This is not a judgement of NKE’s prospects. I am merely trading the ranges at hand given our current macro environment.


Click to Enlarge
My last Nike trade yielded a decent profit, so now I am looking to repeat performance for the mid-term.

NKE Stock Trade Idea

The Trade: Sell the NKE Oct $45 put for 80 cents per contract. Here I have a 90% theoretical chance of success. By selling the puts naked, I am, however, committing to owning the shares at $45 with a breakeven at $44.20 per share. I only do this if I am willing and able to buy them. Otherwise I can sell the credit put spread instead for a chance to yield 10% on risk.

Usually I like to hedge my bet by selling opposing risk but given the size of the recent drop, I will delay that for now. Instead I could sell bearish risk against the sector as a whole.


Click to Enlarge
Retail has been chopping around a long-term flat channel. Wall Street still sees the group as extremely challenged. Add to this that we are at all-time-high markets, so the upside in retail should be limited. Therefore I can sell upside risk in the SPDR S&P Retail (ETF) (NYSEARCA:XRT) to balance my longs in Nike stock.

The Hedge (Optional): Sell the XRT Jan 2018 $51 calls for 60 cents. This is a bearish trade that has an 85% theoretical chance of success. This is not a direct hedge to NKE but it will provide balance. Selling naked calls carries unlimited risk, so I will keep this on a very tight leash.

Learn options as easy as 1-2-3 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/nike-inc-nke-stock-reload-long/.

©2024 InvestorPlace Media, LLC