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Quick Income on Nike Before a Reversion to the Mean

The market got a little ahead of itself

If you were wondering how the Bureau of Labor Statistics’ (BLS) labor report could show an additional 4.8 million jobs added to the economy in June with 1.43 million new unemployment claims — and a virtually unchanged number of continuing claims for unemployment at the same time — you’ve come to the right place.

Both of those announcements were released last Thursday, and the big labor numbers seem to have encouraged investors despite the contradiction.

Nike (NASDAQ:NKE) is one stock that saw some bullish buying, and if you, like us, have been holding shares, its push higher makes this a perfect time to sell covered calls.

Explaining the Labor Numbers

The short explanation of the discrepancy between unemployment claims and jobs added to the economy is that these numbers reflect different times. That’s not a very satisfactory answer, but it can still be helpful to understand that the jobs numbers reflect what the labor market looked like nearly three weeks ago while the unemployment claims number represents claims submitted through Friday, June 27.

Normally, these delays and time-frame mismatches aren’t a big deal because the numbers don’t generally move very quickly. However, last week was a different story because infection rates were rising, restrictions on public gatherings were being reinstated, and attendance at bars and restaurants was dropping.

In our view, last Thursday’s data would likely look much worse if it was possible to reflect what was happening last week, and therefore, the market got overextended.

To be clear, we aren’t suggesting that this a true fakeout or that we believe the market will drop like it did earlier this year. We do feel that prices are likely to “revert to the mean” in the short term, so selling a covered call against NKE while it is higher is a great way to generate income before the next correction.

What Does This Mean for NKE?

According to Reuters, fashion brands and retailers are seeing reduced demand across the globe, even as countries reopen. NKE was forced to cancel around 30% of its orders from before the pandemic because so many retailers have unsold goods from the spring.

We expect reality to put investors in check soon, sending the market and NKE down slightly.

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

In NKE’s case, that could mean dropping back to support just above its 50-day moving average or retesting supports at around $96 per share. Either way, selling a covered call with a strike price at around $100 would be an excellent way to capitalize on NKE’s bullishness, especially if you, like us, originally purchased shares of the stock for $99 each.

We wouldn’t recommend looking beyond July for an expiration though. Remember, it’s a volatile market.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/quick-income-on-nike-before-a-reversion-to-the-mean/.

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