Usually, Nike Inc (NYSE:NKE) stock gets punished in sympathy to brick-and-mortar retail stocks. This was the case in May when we saw a general retail earnings debacle from Macy’s Inc (NYSE:M), J C Penney Company Inc (NYSE:JCP) and Nordstrom, Inc. (NYSE:JWN). Retail stocks are still reeling from the pain that Amazon.com, Inc. (NASDAQ:AMZN) inflicted on the sector.
Last week, Nike caused its own drama. Among other things, management raised cautions around its business and announced a 2% reduction in headcount. This caused unease among investors as it could be a sign of serious weakness to come.
Once the dust settles, I’d rather see management taking anticipatory action rather than react too late. Wall Street doesn’t see it my way yet.
NKE stock is still reasonably valued from a fundamental standpoint. Furthermore, analyst expectations are not outrageous. This usually means that the experts are likely to defend the company on the heels of last week’s price drop.
Click to Enlarge Technically, Nike shares recently fell out of an ascending trading channel. Now price is bumping along what should be support levels. This is not so much of a hard line, but rather an area where NKE should find footing.
With NKE stock near its 52-week lows, the thesis here is to initiate a long entry point close to near-term bottoms. However, I won’t be buying the stock outright with no room for error. Instead, I will use NKE options where I can choose better odds of success.
The Trade: Sell the NKE Oct $45 put for 80 cents per contract. This is a bullish trade that needs price to stay above my strike to win. In theory, I have a 85% chance that I will indeed be able to retain my maximum gains. Otherwise, if price falls below my strike, I would own the shares and could suffer losses below $44.20.
Not everyone is able or willing to commit to owning NKE shares. For those, I would use spreads instead.
The Alternate: Sell the NKE Oct $45/$42.50 bull put spread where I have about the same chances of success, but with limited risk. If successful, the spread yields 14%.
Compare this with catching the falling knife at $51.60 and needing NKE stock to rally 14% just to match the performance of the spread.
But remember, selling options is risky business. Only risk what you can afford to lose.
Learn how to generate income from options 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.