After Pfizer (NYSE:PFE) announced the success of its vaccine trials last week, Moderna (NASDAQ:MRNA) announced its successful trials this week. Stocks gained some momentum thanks to this double-header.
But the market isn’t totally settled yet.
We’re still concerned about rising COVID-19 infection rates hurting the market in the short term, and a vaccine (or two) that hasn’t been approved, manufactured and fully distributed isn’t any good to anybody yet. But if the market shares those concerns, it hasn’t shown it.
Some of the fear in the market has subsided as the drama from the election starts to fade, so investors might be looking past the current pandemic-related risks and focus on upcoming stimulus. That could explain why we haven’t seen much of a selloff this week.
We feel that in most cases, the market overshot its expectations that such an announcement would trigger an immediate return to normal. A reversion to the mean in the short term would be pretty typical.
Overall, it’s time to be cautious about your exposure to the market. Weighing the risk and reward of any given position is especially important right now. For us, the risk/reward outlook for a new put write on Nike (NASDAQ:NKE) makes it worth taking.
Why is NKE Doing Well?
We had a few big retail reports this week, including Walmart (NYSE:WMT) and Home Depot (NYSE:HD) on Tuesday, and both companies exceeded expectations but warned about future demand. The U.S. Census Bureau also reported month-over-month retail spending for October on Tuesday, which missed growth estimates by 40%.
As you can see in the following chart, retail spending took a big hit when the COVID-19 pandemic hit the U.S. in the first and second quarters this year. On the surface, the chart seems to imply that consumers have made up the losses and spending growth has continued, but that is only half true.
Advance Real Retail and Food Service Sales — Chart Source: Federal Reserve Economic Data (FRED)
Despite these ongoing spending issues, retail apparel has continued to do very well this quarter.
We don’t have to wonder why. As Kate Fitzsimons of RBC Capital explains:
We’ve seen certain categories being more resilient through COVID, and certainly athletic is a beneficiary of that. People are working out at home. People are going on runs more often. But also you do see this shift to casualization. People are being more comfortable, wearing leggings at home… and certainly the athletic category is a beneficiary of that.
As consumer behaviors shift during the pandemic, we’ve also kept track of which companies are set up to cater to new trends.
NKE is perfectly positioned to sell to consumers during a pandemic.
People have been praising NKE for its focus on digital sales since 2019, but the pandemic has made digital sales critical. NKE has one of the best direct-to-consumer (DTC) strategies around.
When the company reported earnings in September, it postest strong e-commerce numbers. As Zacks Research says:
In the fiscal first quarter, NIKE Direct sales increased 12% on a reported basis and 13% on a currency-neutral basis. Meanwhile, digital sales for the NIKE Brand were up 82% on a reported basis and 83% on a currency-neutral basis. Digital sales for the brand were mainly aided by double-digit growth across North America, Greater China, and APLA along with triple-digit growth in EMEA. Notably, digital sales for the brand contributed about 30% to total revenues in the reported quarter.
Simply put: NKE is better equipped to survive the ups-and-downs of short-term pandemic-related volatility, and it will continue growing after the pandemic ends.
Get Money From NKE Today
We want to be aggressive with our position on NKE because premiums are elevated thanks to all the additional volatility in the market.
If you look at the chart below, you can see that the stock bounced off the $125 level last week. NKE has also finally broken resistance at $130 and is retested that level as support. That provides two potential strike prices.
As we said, we want to be aggressive, and that means picking a strike price that offers a decent premium and picking an expiration date that does the same.
The $130 strike price seems a little risky given the market’s delicate state, so we want to be more cautious. The $125 level will still offer an excellent premium if traders sell puts that expire later in December.
As an added bonus, if those trades expired in the money and traders had to take possession of the stock, they would get a deeper discount from NKE’s current price.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.