Nike Inc. (NKE) is slated to step into the earnings limelight after the close of trading tomorrow, and the company is on track to top Wall Street’s expectations once again. NKE has a history of blowing past the consensus estimate, but the recent market selloff may have investors concerned, especially with Nike stock dipping below its 50-day moving average yesterday.
The question before NKE traders is: “Do you stand with the stock’s track record, or go with the broader market flow?”
For the record, Nike is expected to post a second-quarter profit of 70 cents per share, a figure that is up 18% over the same quarter last year. Revenue is seen rising 11% to $7.15 billion. Nike has averaged quarterly sales growth in excess of 10% for some time now, riding the growing popularity of the “athlecasual” casual trend where one wears workout clothing, but doesn’t actually work out.
Click to Enlarge It is likely that most of Nike’s strong fundamentals are already priced into the shares. So far this year, NKE stock has rallied roughly 20%, with the shares trending higher along support at their 10-, 20- and 50-day moving averages. The shares have recently been pressured below their 50-day trendline by broad-market selling pressure, but this may present an opportunity for NKE bulls, with the stock now trading near oversold levels.
On the sentiment front, analysts remain firmly bullish on Nike’s prospects. Specifically, Thomson/First Call data points to 19 “buy” ratings and nine “holds,” with nary a “sell” to be found. Additionally, the 12-month consensus price-target of $102 represents a respectable premium to yesterday’s close at $93.21.
The recent selloff has prompted a preference for puts among short-term options traders, but the rise in put volume has had a negligible effect on Nike stock’s put/call ratios. For instance, the December/January ratio arrives at a modestly bearish 1.17, while the front-month December ratio dips to 0.87, with calls still outnumbering puts by a fair margin.
Overall, December implieds are pricing in a potential post earnings move of about 4% for Nike stock. This places the upper bound near $96.78, while the lower bound lies at $89.22. A post-earnings rally would return NKE to its perch above daily trendline support, while a decline could send the shares down for a retest of support near $90.
2 Trades for Nike Stock
Call Spread: For those traders willing to take a chance on Nike stock, a Jan $92.50/$95 bull call spread stands a fair change of turning a profit. At last check, this spread was offered at $1.20, or $120 per pair of contracts. Breakeven lies at $93.70, while a maximum profit of $1.30, or $130, is possible if NKE closes at or above $95 when January options expire.
Put Sell: Alternately, if the current market headwinds have you worried, you could look into a put sell position. Along those lines, a Dec $85 put sell might be a way to capitalize on NKE’s technical support. After the close last night, the Dec $85 put was bid at 14 cents, or $14 per contract. The upside to this put sell strategy is that you keep the premium as long as Nike stock closes at or above $85 when December options expire at the end of this week. The downside is that should NKE trade below $85 ahead of expiration, you could be assigned 100 shares for each put sold at a cost of $85 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
