We all know the damage that Amazon.com, Inc. (NASDAQ:AMZN) has inflicted on the brick-and-mortar retail sector. Nike Inc (NYSE:NKE) often suffered corrections along with them. For example, this summer NKE stock fell 4% on a bad shoe-store headline. But eventually, its solid fundamentals won investors back over as they bought the dips.
Year-to-date, NKE stock is up 20% whereas the SPDR S&P Retail (ETF) (NYSEARCA:XRT) is flat. Foot Locker, Inc. (NYSE:FL) and Macy’s Inc (NYSE:M) are down 40%.
Clearly, traders think Nike should trade on its own brand sales fundamentals and not with the fate of the outlets that sell it.
Nike is a global stock, so it also recently suffered at the hands of Adidas AG (ADR) (OTCMKTS:ADDYY). Markets for a while believed that Adidas was cutting into NKE’s lead. That meme has since faded and shall pass in the end. Before that, NKE had to deal with the threat from Under Armour Inc (NYSE:UAA).
How to Trade NKE Stock
The last time NKE stock failed at $59, I sold puts into the fear knowing that the bulls will support it at $50 and $52 and they did. My trades won and yielded maximum gains. Today’s trade setup is not one based on fear, but on proven support.
So the bottom line is that traders bought the Nike stock dip. Now there is a chance the rally will continue. I want to profit from that potential, but with room for error.
As long as the macroeconomic conditions persist, NKE should not have a sustained correction. I do fear that retail in general could be extended over its skis into the holiday. But even if they fall, Nike stock should continue to do better than the collective. So I won’t mind owning the shares, even if the worst case scenario occurs to my trade.
Although NKE stock is not a screaming bargain from a fundamental perspective, it’s not expensive. It trades with a 29 price-to-earning ratio. It also pays a dividend.
Relative to the retail industry, these are enviable metrics. Deckers Outdoor Corp (NYSE:DECK) has a 77 price-to-earnings ratio and much smaller margins.
Wall Street experts agree with me. NKE stock is still trading around the average price target. Most analysts have a buy bias on the stock, so in theory it should eventually migrate higher. But in my trading style, I don’t depend on that. All I need to succeed is that it holds support.
I have better faith in proven support levels and value than in upside targets.
The Trade: Sell the NKE Apr $52.50 put for 60 cents. This is a bullish trade for which I have an 85% theoretical chance of success. But if Nike stock corrects, I would accrue losses below $51.90-per-share.
Selling naked puts carries big risk, especially for a retail stock. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the NKE Apr $52.50/$50 credit put spread. This is also a bullish trade, but one with much smaller risk. If it wins, it would yield 10%. Neither trades require a rally to profit. In fact, NKE stock can fall another 15% from here and I can still retain maximum gains.
Compare that with risking $62 to buy Nike stock outright without room for error, expecting a rally to profit.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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.
