This year has been a disaster for Nike Inc (NKE). NKE stock fell 13% year-to-date, but it still sports a 6.5% gain for the past year. That’s what happens when you’re the global leader in its industry against which all other competitors are measured.
Fundamentally, NKE is a proven performer. The recent trouble is not specific to Nike alone; retail in general has been a complete disaster. Consider that Under Armour Inc (UA), a top growth stock in retail, is down 55% over the past year.
Last March, investors hated Nike’s earnings report and brought NKE from $65 to $54 per share. Now, it sits at an important pivot point for several trend lines. On a technical basis, $54 has served as a bounce level, most recently for the December 2015 selloff. The $54 stock price was also the level from where NKE stock rallied to all-time highs.
By connecting a few dots on Nike’s chart, I can clearly see the importance of the $54 per share area: It’s a meeting point that will likely result in a sizeable move. The direction of that move will likely coincide with its coming earnings report in late June. Also, by looking at the chart, I can identify likely support levels against which I can set my trades.
Click to Enlarge My overall assessment is that markets in general are on shaky fundamental ground. However, the price action has been undeniably bullish.
In a rising market, I think that NKE stock has more upside potential than downside risk. Instead of buying NKE outright, it’s better to trade its options, selling puts to fund call buying.
Nike (NKE) Stock Options Play
Trade #1: Sell the NKE Jan $42.50 put. This is a bullish trade for which you collect $1.05 per contract. Ideally, NKE needs to stay above the strike price or you risk holding the stock at $42.50 per share. I look at it differently: You’re basically getting paid the equivalent of 2% current value for a chance to buy the stock at a 21% discount from the current price of $54 per share.
Trade #2 – Optional: Buy the NKE July $57.50 call. This also is a bullish trade for which I pay 68 cents per contract. This second trade is optional since some traders prefer to skip this step and settle for collecting the put premium.
Since the net effect of taking both trades is a 36 cents net credit, you get paid to go long Nike stock. Even if NKE falls, but stays above $42.50 this year, you book the net credit as profit. If Nike stock rallies by July, you can sell the calls for a profit. The entire value of calls at the time of the sale would be pure profit.
A word of caution: You should only sell naked puts if you are willing and able to buy the stock at that price.
If assigned NKE stock, you could suffer losses below the strike price sold. In this case, the risk is 21% lower than current NKE stock price.
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.
