With market volatility on the rise, it’s time to be more picky with your trade selections. One red-hot target right now is Nike Inc (NYSE:NKE). Nike stock has rallied sharply of late, as Wall Street cheers the company’s impressive third-quarter earnings report. But the rally isn’t over. According to NKE options, Nike could top $70 before the end of this month.
Before we get to today’s Nike options trades, let’s look at why NKE stock is rallying. Back in March, the company posted third-quarter earnings of 68 cents per share, beating Wall Street’s targets. Nike also beat revenue expectations, recording $8.98 billion in sales.
By itself, this quarterly report was impressive. However, when you combine it with the fact that competitors like Under Armour, Inc. (NYSE:UA) are struggling, it gets even better for Nike.
Click to Enlarge What’s more, sentiment has plenty of room for improvement for NKE stock. According to Thomson/First Call data, only 19 of the 37 analysts following Nike rate the shares a “buy” or better. This leaves plenty of room for potential upgrades. Furthermore, the 12-month consensus price-target of $71.27 represents a meager premium of just 4.16% to yesterday’s close.
Price-target increases are certainly in the offing if NKE’s stock chart continue to improve.
Speaking of technicals, NKE just broke out above the upper rail of a short-term trend channel. Nike had been mired in a trading range between $64 and $67 for the past month, and now the shares are breaking solidly higher. The next potential hurdle lies at $70, which NKE options indicate could fall by the end of April.
But NKE options traders are not all that bullish on NKE’s short-term prospects, despite the strong technicals and fundamentals. Specifically, the April put/call open interest ratio arrives at 1.38, as puts easily outnumber calls among near-term options. That said, most of these put contracts lie at deep out-of-the-money strikes, hinting that these Nike options are protective rather than speculative in nature.
Overall, April implieds are pricing in a potential of about 4.6% for Nike stock heading into expiration. This places the upper bound near $71.70, while the lower bound lies at $65.30.
Two NKE Options Trades
Call Spread: For those traders looking to ride the post-earnings rally to a breakout above $70, an April $69.50/$70 bull call spread stands a fair chance of turning a profit. At last check, this spread was offered at 4 cents, or $4 per pair of contracts. Breakeven lies at $69.54, while a maximum profit of 96 cents, or $96 per pair of contracts, is possible if Nike stock closes at or above $70 when April NKE options expire.
Put Sell: Alternately, if you are uncertain about the strength of Nike’s post earnings rally, you could look into a put sell position. Along those lines, an April $64 put sell might be a way to capitalize on NKE’s technical support. At last check, the April $64 put was bid at 26 cents, or $26 per contract.
The upside to this put sell strategy is that you keep the premium as long as Nike stock closes at or above $64 when April options expire at the end of next week. The downside is that should NKE trade below $64 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $64 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
