The market bounced off its lows on Monday and it was more or less positive yesterday after the Federal Reserve followed through on purchasing more corporate bonds, the Trump administration spread rumors of a $1 trillion infrastructure spending plan, and retail sales data for the last month showed that retail spending increased by 17.7% — more than double what was expected.
We are still somewhat concerned about the rising rate of infection in China and the U.S. Another large COVID-19 outbreak could be a sentiment-killer for the market.
Therefore, we recommend taking a middle path by selling covered call against a stock you may already own: Nike, Inc. (NASDAQ:NKE).
Looking at NKE’s Last Earnings Report
The last time we recommended a trade on NKE, we mentioned its most recent earnings report. NKE beat expectations by a little over 44%, coming in at $0.78 per share.
That data is obviously old, but as we said in our last trade on NKE, much of NKE’s growth in the preceding quarter came from increased digital sales in China, the region that was dealing with COVID-19 much earlier than the rest of the world.
While consumption in the U.S. did fall by over 14% in April, it bounced back in May. We think NKE captured some of that income. While the company may not put up big numbers for next quarter’s earnings reports, we do think the stock will benefit from the optimism around retail.
Taking Advantage of Earnings-Related Volatility
NKE will report earnings on June 25, so by selling a covered call that expires after that point, we can collect even more income. We originally purchased NKE for $99, and with the stock on the rise, we want to set our strike price somewhere above that. That way, if our covered call expires in the money, we will still turn a profit.
Daily Chart of Nike, Inc. (NKE) — Chart Source: TradingView
If NKE drops in the run-up to or just after earnings, we may have an opportunity to close the trade early, locking in our profits and giving us a chance to earn more income. This strategy has worked out great for us during the recent volatility, allowing us to make much more in total premium over a shorter period than we would have been able to otherwise.
We think selling an option that expires in mid-July is the best way to play NKE, but remember, you can only sell a covered call if you already own shares of NKE.
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.
