Earnings season begins this week, and there is a good chance that investors will send stocks lower. We want to take advantage with a covered call on our shares of Nike, Inc. (NYSE:NKE).

First quarter reports from the big money-center banks start streaming in tomorrow. Right now, we expect the news to look better than expected on the surface.

The banks have likely experienced some windfall profits from trading volume, and mortgage originations are through the roof.

However, traders have good cause to be a little nervous. We are most interested in default rates, credit card debt levels and any losses associated with high-yield bonds, which could be higher than expected.

Whether companies like Bank of America (NYSE:BAC) are willing to provide an outlook — even a bad outlook — will also be an important sign of confidence. If management teams are so uncertain that they are unwilling to provide any future guidance, we could see stock prices take a bigger hit.

NKE’s Last Earnings Report

In late March, NKE reported better-than-expected earnings. The market was starting to rise because of news that Congress was working on a stimulus package, and NKE followed the market.

It’s tempting to think NKE’s earnings beat was the cause, but those numbers represent performance for a quarter that had already ended. The COVID-19 outbreak was likely to impact the stock over the next few quarters, and analysts have revised earnings expectations for NKE.

But the virus originated in China, so that country was hit much harder last quarter, and NKE provided data showing growth in digital business in the region. The company also showed signs that its operations in China were normalizing, giving it a boost.

We still like our common stock position in NKE, but if we are going to continue holding shares, we want to generate income on them. NKE’s slight drop yesterday has given us the chance to sell a covered call.

An Inflection Point at $90

Hedging our trade with a covered call means our NKE shares aren’t just collecting dust in our portfolio. We’ve closed one short call on NKE for a profit, keeping 50% of the premium we earned from selling the option.

As you can see in the following chart, the $90 price level is a key inflection point where support and resistance have been strong. If you are holding shares of NKE, we think $90 would make an excellent strike price for a covered call because it moderates the risk of being called out in the short term. The stock is unlikely to break above that level over the next few weeks.

Daily Chart of Nike, Inc. (NKE) — Chart Source: TradingView

We’re looking at early and mid-May expiration dates. They offer good premium without keeping you in the trade for longer than a month.

If the major stock indexes start to drop, NKE will likely move lower as well. Traders may have another chance to roll the trade out by buying their calls back at a much cheaper price and selling new calls with a strike price near NKE’s highs.

InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.