Investors have been acting a little nervous lately, and the Federal Reserve’s recitations of risks to the economy on Wednesday didn’t help much. However, the bright side to the current situation is that it has increased pressure on the U.S. Senate to get more aggressive about stimulus and unemployment benefits.
Stuck in between Democrats in the U.S. House of Representatives and urging from President Trump, it seems to us that another, larger round of stimulus is likely in the short term. We plan to take advantage of that potential with another bullish position in a retail stock.
Nike (NASDAQ:NKE) is one company that has already seen some bullishness. The stock hit a new all-time high this week — and we think it looks strong enough to warrant a short-put play.
Ignoring Mixed Guidance
Thought its price is pushing higher, NKE has actually lowered its earnings expectations for the rest of the year. That doesn’t seem to have stopped investors from piling in.
Part of that is the potential for more stimulus, but NKE is also helped by the return of professional sports — football, in particular.
Its products gain visibility when sports are on, so its only right that investors should see that as a positive.
The company has also made key changes to its business, emphasizing its focus on digital sales and reducing its focus on retail sales.
As CEO John Donahoe pointed out, “Consumer behavior is shifting fundamentally during this pandemic, and we don’t think it’s going to flip back.”
That’s a realistic expectation, and even if we do get back to some sense of normalcy in the future, it won’t be anytime soon.
Looking Past Earnings
NKE reports earnings on Sept. 22, after the market closes. To maximize the premium they can collect, traders can sell an option that expires in early to mid-October, but they will be taking on more risk. We think that risk is justified.
NKE has so far been able to take advantage of stimulus spending and stable consumption numbers to continue its outperformance despite some intermittent disruptions to its supply chain.
Daily Chart of Nike (NKE) — Chart Source: TradingView
At this point, we think the online shopping season in the fourth quarter will likely play out in its favor. From a technical perspective, we don’t expect support near $110 to break, but if the market remains choppy, we may see the stock’s price bouncing off that level again before the trade is over.
In fact, the support formed at $110 may even make a good strike price for a naked put write.
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.