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This morning I am recommending a bearish trade on NIKE, Inc. (NYSE:NKE). While NKE bounced with the rest of the market yesterday, the stock also crossed below its old support level of $71 this week.
If you look at the chart below, you’ll see that the $71 level previously acted as resistance for NKE in May, but in late June, that old resistance level served as support.
Prices gapped up after NKE announced earnings, and from June through September, the stock consistently traded above its 50-day moving average.
Daily Chart of NIKE, Inc. (NKE) — Chart Source: TradingView
In late October, the stock’s intraday low crossed below resistance at $71. Then NKE opened below $70 in mid-November. Finally, on Monday, the stock closed just above $69.
The $78 level has consistently acted as resistance on all of the subsequent bounces, and we are now seeing the beginnings of a downward channel.
NKE will announce earnings after the close tomorrow, Dec. 20, 2018. In my view, the tariffs levied against China could negatively affect the stock’s results.
In this market environment, companies need to put up big earnings to attract investors.
NKE is expected to report earnings of $0.46 per share, which would be flat compared to the same quarter last year. If the company misses or even just meets expectations, there is a good chance the stock will fall further below $71 in the near term.
With that in mind, I’m recommending a bearish put debit spread on NKE today.
Using a spread order, buy to open the NKE Jan. 18th (2019) $67.50 put and sell to open the NKE Jan. 18th (2019) $65 put for a net debit of about $0.60.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.