Deciding whether or not to add a new stock into a stock investment portfolio is simpler than many investors think. One of the most important things is for the stock to be moving in the right direction and Nike Stock certainly doesn’t seem to meet that criteria. It has had a great run-up from the lows of March 2009 but now it is entering a tougher retail environment which is being reflected in Nike’s stock price.
There are a variety of option strategies for income that can be applied to almost any stock. The success of applying option strategies for income however depends on selecting the correct time to enter and exit an option strategy. Looking at Nike Stock I can see some interesting option trades, but only one that looks quite profitable when compared to the risk of capital.
Recently a number of readers emailed me about Nike Stock whose earnings surprised to the downside this past week with earnings of $1.17 versus an expected $1.37. The earnings announcement drove down the price of Nike Stock far below the 200 day moving average which was above the $100 Nike Stock price.
A stock investment in Nike Stock at this point of the year I think it a poor choice. Nike stock has had its share of problems this past year and inventories are up 23% in the last quarter alone. Nike complained that its results were hurt by lower gross margins, higher expenses and a charge to restructure its Western European businesses as well as declining sales in China which rose just 2% this past quarter.
Nike stock on Friday fell to $85.10 before closing at $87.78. In May the stock was above $114.00. Nike stock is trading at 18.5 times price to earning which is in line with the industry average. Annual dividend is $1.44 or 1.64% at the time of this article. When a stock falls investors get excited and while a lot of investors may find Friday’s Nike Stock price intriguing from a stock investment perspective I see no reason to consider catching this falling knife yet, unless you want to consider the stock and option combination trade when I discuss further into the article.
Stock Call Or Put for Nike Stock
I do not invest in Nike Stock. Overall I like more diversified companies for a stock investment. As well even at $87.78 I do not feel Nike stock is cheap. Looking at the chart below, the question is where is support for Nike Stock?
The lows last summer were around the mid $78 range and in the fall of last year the lows were in the $83 range. There is probably enough support around $83 to slow any further descent in Nike Stock.
Nike Stock 1 Year Stock Chart showing support levels from 2011
Put Selling Nike Stock But Not For A Stock Investment
Put Selling Nike stock at the $85 range I think is poor for those investors who do not want to be assigned shares. I believe the likelihood of the stock reaching $85 within the next 3 weeks is probably good. Nike stock is already declining and has been for some time. Put selling below $85 at the $82.50 level is hardly worthwhile with $82.50 put option premiums trading for around the .60 cents level. For an investor interested in selling puts naked, I would stay at least out to $82.50 when you consider that in the fall last year Nike stock was trading around $83.00. This would make the $82.50 put strike somewhat interesting but not very profitable.
July 2012 Put Selling Premiums As Of Friday June 30 in Nike Stock
Whether or not the put premiums at $82.50 are interesting is debatable. I certainly don’t find the put premiums compelling enough to warrant risking my capital, but there is probably enough support that selling the July $82.50 puts may end with those put options expiring worthless. But put selling with a mind to ending up with Nike as a stock investment I think is a poor choice.
Stay 1 Month Out When Put Selling Nike Stock
When put selling against stock you do not want to own, you must be aware of the direction of the stock. Nike Stock is in a downtrend. Normally put selling against stocks you have no interest in owning means you should be put selling stocks in uptrends or certainly those stuck in trading ranges. I would want to see Nike Stock establish a new trading range before getting very excited about put selling Nike Stock.
For safety, I would only consider one month out options when put selling Nike Stock. Nike stock is in a definite decline and staying one month out is one of the best ways to protect yourself from stock assignment.
Consider Selling Nike Stock Naked Calls Based On Stock Technical Analysis
Looking at the stock technical analysis through the Ultimate Oscillator, MACD, slow stochastic and fast stochastic as of Friday’s close shows Nike Stock is extremely oversold and could bounce. Doing a stock technical analysis after such a plummet can often direct an investor to a short-term profitable trade. All the stock market analysis indicators are indicating that Nike stock could move higher on Monday or certainly early next week and then probably pull back to test for support and set up a new trading range. For investors interested in Nike Stock possibly selling naked calls when the stock bounces would make for a profitable income option trade.
Stock technical analysis shows that Nike Stock is extremely oversold and should bounce.
Consider A Nike Stock Strangle Option Strategy
Not cheap by any means, a strangle option strategy might be worth considering. I would go out at least to August for a strangle option strategy to give enough time for the stock to move around and drive either the call side up or the put side lower. An investor could consider buying the August $85 put options and $92.50 call options for the strangle option strategy.
Above are the August Options for Nike Stock which could be considered for a Strangle Option Strategy
Reduce The Strangle Option Strategy Cost By Turning Them Into Spreads
To reduce the cost of the strangle option strategy for Nike Stock you could consider turning both the call and put option purchases into spreads by selling the August $80 put option and the August $95 call option. Again though the strangle option strategy is not for a stock investment but for options income.
Have You Thought About Just Buying Put Options?
Perhaps a good options strategy for income trade will be once Nike Stock bounces and then buying a put option for a move lower in Nike Stock. This is a simple put option trade which could create profitable returns especially if Nike Stock falls back to the $83.00 range. Again though this is not for a stock investment in Nike Stock.
Best Stock Investment Trade For Nike Stock Is A Stock And Option Combination.
If you are positive you want Nike Stock as a Stock Investment, then probably the best strategy is a combination of Nike stock and options.
A Stock And Pption strategy in Nike Stock would look like this:
If you bought Nike stock on Friday at the close of $87.78, you would sell the $90.00 covered call options for $5.75. This reduces your cost in the stock from $87.78 to $82.03 which is below the $83.00 level where longer-term support from last fall sits in Nike Stock.
Meanwhile you add to the stock and option strategy by also put selling an equal number of the January 2013 $80.00 put options for $4.20.
If the stock ends up somewhere above $77.50 by January but below $90, you get to keep both the call and put options premiums, for a total of $9.95. Your total cost in Nike Stock is reduced from $87.78 to $77.83 which moves you into the lows of August 2011.
If Nike stock falls to below $80.00 you still keep all the option premium earned, pick up more stock at $77.50 but now your average price for your Nike Stock position is $78.91 again in the low range of August 2011.
If Nike stock closes above $90.00 in January 2013 you again keep all the options premiums of $9.95 plus you earn an additional $2.22 from the difference between $87.78 and $90.00. Your total return would be $9.95 + $2.22 = $12.17 / 87.78 = 13.86% for 6 months work.
I believe the stock and option strategy is the best options for income strategy to use for those investors interested in Nike Stock as a stock investment. This stock and option strategy could be employed continuously if done properly. It would benefit a stock investment portfolio which should be the goal of all investors.
If neither the call or put option side are assigned and expire worthless you still earn $9.95 / $87.78 or 11.33% and you can repeat the entire Stock and Option strategy again with the Nike stock investment.
What I Don’t Like About Nike Stock Option Trades
Aside from the stock and option strategy I see nothing compelling with Nike Stock. Even the strangle options strategy holds little interest for me. If Nike Stock was at the $78 level I would be a lot more interested and definitely would consider the stock and option combination. The easiest money in Nike Stock was probably made by those investors who bought put options in May or early June or shorted Nike stock when it was above $100.
Aside from the Stock and Option trade mentioned, I just don’t see anything that excites me in Nike Stock as a stock investment. I follow a handful of stocks in my stock investment portfolio and selling the $82.50 Nike Stock put for .60 cents for 3 weeks to options expiry isn’t appealing. Selling naked calls could be profitable but no more so than my other trades. There is a lot more risk in Nike Stock at this level than most of my other stocks and I am earning decent returns for much less risk.
Nike Stock Option Strategies For Income Conclusion
For those investors interested in Nike Stock as a stock investment for put selling or other option strategies, I hope some of the ideas I have covered here may prove interesting. I believe the Stock and Option combination is the most interesting and probably most profitable. How rewarding any of these option trades will be is questionable which is why I have no interest in adding Nike Stock to my stock investment portfolio at this time. When it comes to Option Strategies For Income, I believe there are better stocks to consider than Nike Stock.