Nike (NYSE:NKE) stock had been on a tear in 2018, up more than 30% coming into it’s earnings event. But last night, management reported earnings and Nike stock fell 4% on the headline. It has recovered some since then, but there still is disappointment on Wall Street.
It was so much that they missed the mark. They reported a decent quarter in line with estimates, but after the hoopla that followed the Kaepernick campaign, the lack of pizzazz in the numbers was a letdown. Furthermore, there was a small bump in cost, so margin was also a slight issue.
Theoretically, any disappointment in Nike management is a reason to catch a falling knife.
Nike has a proven team that continues to deliver on its promises. The brand is global and so far competition is failed to upstage it. Many have tried, but the challenges from Adidas (OTCMKTS:ADDYY) and Under Armour (NYSE:UAA) have failed to upend Nike stock.
Retail in general has been strong. It outperforms the indices this year and Nike is in the lead of that pack. One boring quarter is not a reason to sustain a selling frenzy on NKE stock.
The general markets are at all-time highs so that adds to the danger of buying Nike stock at these levels and on its first dip. So I use options where I can go long Nike on this small hiccup yet leave room for error in case the selling lingers for a few days.
Fundamentally, NKE is not cheap. It trades at a price-to-earnings ratio 32, which is more expensive than Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) for perspective.
Technically, the stock could withstand more downside pressure and maintain its trajectory. There are support levels immediately below this morning’s trading zone and more support all the way down to $70 per share.
Stocks usually don’t go up without periods of rest. Once they break through a neckline, the bulls need to revisit it to make sure it becomes solid footing from which they spring to higher highs.
The overall macroeconomic conditions still favor the bullish thesis, but we still have the global tariff wars to deal with, especially the one with China and rising rates. Nevertheless, I expect that Nike stock should do well through the end of this year at least.
How to Trade Nike Stock
The Trade: Sell the NKE Jan 2019 $72.5 naked put for $1.10. This is a bullish trade, where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $71.40.
Selling naked puts is daunting, especially when markets are at all-time highs. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the NKE Jan 2019 $72.50/$70 credit put spread. The spread has the same odds but would deliver 15% yield on risk. The stock can fall an additional 15% and I could still retain maximum gains.
Today’s trade, although it would benefit from one, doesn’t need a rally to profit. I merely need NKE stock to hold its support for the next few months. I am betting that the value in the stock will prevent sellers from taking too far. If they do, then I want to own the shares at a discount from here.
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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.
