People often say this is the most hated bull market of all time. But I fail to see what’s so hated about it. We’ve had no significant dip in equity prices, and the ones we did get were immediate opportunities to reload with bullish trades. The stock market keeps setting higher highs and defying gravity. Unfortunately, this is not the case for Nike Inc (NYSE:NKE).
This week, management reported earnings and NKE stock got hammered down more than 4% on the headline. However, the stock is showing the willingness to find a bottom. By the end of the day, it had recovered a large portion of the initial selloff.
So you guessed it, I am trying to catch the proverbial falling knife today.
But the difference is that I’m not going to buy Nike stock and hope that it rallies so I can profit. Instead, I will use NKE options so I can build myself a healthy buffer zone just in case this doesn’t turn out to be the bottom on this headline.
In addition to Nike’s woes, the stock has to contend with the general malaise that plagues the whole retail sector. For many months, Wall Street has been hating on retail stocks — just look at Macy’s Inc (NYSE:M), which is now half of what it was five year ago. Even high-fliers like Ulta Beauty Inc (NASDAQ:ULTA) are well off their highs.
When I see value, I like to bet on it. The valuation for NKE stock is reasonable. Its price-to-earnings is comparable to its competition, yet it has superior fundamentals and it pays a dividend. The lower its stock price goes, the higher the yield, and in this very low interest rate environment, a good dividend can be an attraction to investors.
Click to EnlargeExpectations are in balance. Nike stock now trades just below the average price target. So, in theory, there is just as much upside as downside potential. This doesn’t scream rally, but I am not betting on one today.
Furthermore, the analyst rating favors the odds of a surprise upgrade rather than a downgrade.
In addition NKE has a strong global brand and that is too valuable. I know the current meme is that Adidas AG (ADR) (OTCMKTS:ADDYY) is cutting into NKE’s lead, but in the long run, I don’t think this is going to devastate the stock to the degree that traders are worrying about it now.
I’m confident I may not catch the absolute bottom, but I’m also confident that I will be able to manage my risk successfully. In my worst case scenario — and if NKE stock falls below my expectations — I would own the shares at a 14% discount from here. With a price-to-sales ratio of 2.5, this won’t be a terrible disaster.
Bottom Line on NKE Stock
The bad news for Nike stock is baked in, so I want to bet that it will stabilize from here. Sell downside risk against unrealistic fears for income.
The trade: Sell NKE Jan 2018 $45 naked put and collect 50 cents to open. This is a bullish trade that gives me an 85% theoretical chance of success. But if the price in NKE stock falls below my strike, I own the shares and I can accrue losses below $44.50.
Selling naked puts is daunting, especially when markets are at all time highs. I can mitigate the risk by selling spreads instead.
The alternate bet: Sell NKE Jan 2018 $45/$42.50 credit put spread, where I have about the same odds of winning. And if so, the spread will deliver 10% in yield.
No matter what, investing is risky, so I never bet more than I 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 as @racernic on twitter and stocktwits.
