With stocks crumbling before our eyes, there are some names starting to become attractive from a value perspective. One that I’m willing to take a small, longer-term position on is Nike (NKE). Let’s consider a bull put spread trade in Nike stock.
Nike was able to buck the trend on Friday rising 3% and is currently trading at the lowest P/E ratio we’ve seen for 10 years.
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Traders looking for a more conservative way to play Nike stock using options could use a bull put spread.
As a reminder, a bull put spread is a defined risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if NKE trades sideways or higher, and even sometimes if it trades slightly lower.
Nike Stock: The Setup
Traders who think Nike stock will stay above 45 for the next few months could sell an Aug. 15-expiring 45-40 bull put spread for around $1.20 per set of put option contracts. In other words, sell the 45-strike put and simultaneously buy the 40 put. The $5 difference makes the spread.
Selling this spread would generate roughly $120 in premium with a maximum risk of $380. If the spread expires worthless, that would be a 31.5% return in four months provided Nike stock holds above 45 at expiration. The maximum loss would occur if Nike stock closes below 40 on Aug. 16, which would see the premium seller lose $380 on the trade.
The break-even point for the trade is 43.80, calculated as 45 less the $1.20 option premium per contract. Amid the recent volatility, you could also consider moving the strike prices of this trade $2.50 up or down for each 2.5-point move in Nike stock.
I would set a stop-loss if the spread increased in value from $1.20 to $2.40. Sticking to this stop-loss level will help avoid large losses if the trade goes south.
Given the market environment, I will be keeping position size very small on this one.
According to IBD Stock Checkup, Nike stock ranks number 9 in its group. It has a Composite Rating of 18, an EPS Rating of 40 and a Relative Strength Rating of 21.
Post-Analysis Of Bearish Options Strategies
Thankfully, we’ve been looking at lots of bearish trades lately such as this bear put spread on Intel (INTC), this bear call spread on Advanced Micro Devices (AMD) and this bear put spread on Broadcom (AVGO). All of these have done well and can be closed for great profits.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, and is conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
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