How to Trade Nike Inc (NKE) Stock on This Sales Event
Amazon.com, Inc. (NASDAQ:AMZN) has been causing carnage in the retail sector stocks for months. But this latest dip in stocks like Nike Inc (NYSE:NKE) has been on a general market malaise. This too shall pass, and on this basis I go long quality stocks for the last part of 2017.
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Today I am not buying the stock hoping for a rebound. Instead I prefer to bet that NKE stock has seen the worst of the drops.
This means that I am not relying on having perfect timing to profit. When I buy a stock, I have to be surgical in my entry timing to catch an upswing. But by using Nike options, all I need to do is identify solid support zones against which I can sell risk for income.
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So in essence, I would be getting paid for the opportunity to buy Nike stock even cheaper than here after a 10% correction. This is the definition of catching the falling knife with metal gloves for safety.
Today’s NKE stock downgrade just adds to the fear fuel which could translate into more profits.
Fundamentally, Nike is a global giant with excellent management pedigree. Wall Street rarely has a good reason to sell it. NKE stock often falls in sympathy with action in brick-and-mortar retailers like Macy’s Inc (NYSE:M), or J C Penney Company Inc (NYSE:JCP). Most recently, NKE fell 4% on bad results from Foot Locker, Inc. (NYSE:FL). Punishing NKE stock because of FL’s bad earnings is like selling Apple Inc. (NASDAQ:AAPL) stock because of bad earnings in Best Buy Co Inc (NUSE:BBY).
Recently NKE revealed that it is collaborating with the enemy of traditional retail — Amazon. They will test-sell directly on Amazon.com, which should in time disassociate NKE stock from traditional retail stores.
Critical to my success here is finding support levels that are likely to hold into 2017. Technically, NKE stock has just had a 10% drop, which constitute an official correction in Wall Street terms.
Recently, NKE stock failed from $59, which was the meeting point of two points of interests. Now it falls back into a two-year-old pivot point. Back in June of 2015, NKE stock broke through $53 and has since successfully used that area for support. So between $50 and $52, bulls should put up a good fight.
I will place my risk yet even below that zone of contention for added safety.
NKE Stock Trade Idea
The Trade: Sell NKE Jan $45 put and collect 80 cents per contract to open. Here I have an 80% theoretical chance to retain maximum gains. But if price falls below my strike, then I own it there and would be open to losses below $44.20.
Selling naked puts requires big margins to secure the risk. This can be daunting, especially in uneasy equity markets like we have today. Those who want to further limit the risk can sell spreads instead.
The Alternate Trade: Sell NKE $45/$42.50 credit put spread where my risk is smaller yet if I win, the spread would yield 11%.
In either of my set ups, I don’t need a rally to profit. Compare them with risking $53 to buy Nike shares and hoping for a 15% rally just to match the performance of the spread. Here I can still profit even if NKE stock falls another 15%.
When investing in the stock market there are no guarantees, so I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
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