Everyone can breathe a little easier Thursday after yesterday’s rout.
That's because the U.S. economy grew by 2.8% in the second quarter, considerably higher than the 1.4% increase in the first three months of 2024. However, it’s too early to tell where markets are headed today. As I write this minutes from the open, the markets are basically unchanged in pre-market trading.
Nike (NKE) is one stock that’s been hammered in 2024. It’s down 25% over the past month and now trades ominously close to its 5-year low of $60.00 in March 2020.
One thing that would help Nike’s share price would be for CEO John Donahoe to step down from the top job. He’s not been good for Nike’s share price although not everything that’s happened since he moved from director to CEO in January 2020 is his doing.
Anyway, the drumbeat for his replacement is getting louder.
I believe Nike remains a leader in the sports industry. It will rebound although maybe not as quickly as founder Phil Knight would like.
Nike had five unusually active options in yesterday’s trading. Here are three ways to play them.
Bullish Play # 1
The first bullish play would be to simultaneously buy 100 shares of Nike stock -- I’m using yesterday’s closing price of $71.09 although it’s down a couple of cents in early trading -- and sell one of the four call options listed above.
This is called a buy-write covered-call strategy. It’s done to generate income. Investors tend to use this strategy when they feel the share price will remain around where it’s trading or rise slightly. You’ll get to keep the income if NKE stock remains below the strike price.
So, looking at the four calls, the $72 Aug. 2 call is a little too close for comfort. Based on the $0.93 bid price, your annualized return would be 59%. However, if the share price jumps above $72 and the call buyer exercises their right to buy, you’ll have to sell your shares to them for $72.
Therefore, I’d consider the Aug. 16 $73 call, which had a closing bid price of $1.20, good for an annualized return of 28%. Still respectable, but providing another $1 in breathing room.
Bullish Play # 2
If you believe that Donahoe will be dismissed in the next 57 days -- I have no information to suggest it’s imminent -- then buying a Sept. 20 $72.50 call would be the play.
With an ask price of $2.63, your down payment on 100 shares of Nike stock is 3.6%. That’s not outrageously high, but it’s not a deal either. NKE stock must appreciate by $4.04 (5.7%) over the next two months for you to consider exercising your right to buy.
Again, I’m basing this on the $71.09 closing price. In the real world, the stock price is moving. It’s merely for illustrative purposes.
Looking at Nike’s daily price data over the past three months, its stock has risen by 2% or more on just three occasions, two of them in the past 10 days. That provides hope that the stock is bottoming. A couple more 2% gains over the next 57 days and you’ll be in the money.
Also, with a delta of 0.46601, the shares only have to rise $1.41 (2%) for you to sell the call prior to expiry for a 25% return. Worst case scenario, it doesn’t go anywhere, and you’re out $263.
Bearish Play
This last one is obvious given there is only one put. You buy the Sept. 20 $72.50 strike for an ask price of $3.65. Based on the closing price of $71.09, although the put is technically in the money, due to the $365 paid to buy the put, you’re out of the money by $224.
To break even, the share price has to fall to $68.85. After that you’re making money. The last time Nike stock traded at this level was in March 2020.
I’m not going to say that it won’t happen but I’m skeptical that it’s going to do so in the next two months. As I write this, NKE is up 55 cents to $71.59.
The Bottom Line
I would be shocked if Nike were trading in the low $70s in five years. It’s too good a company to go too far off the tracks. The company has been down this road before where new competitors take market share. It always has made the moves necessary to get it back.
With or without John Donahoe, I’m cautiously optimistic about the next 12-24 months for Nike stock. Of the 29 analysts who cover its stock, 15 rate it a Moderate or Strong Buy (3.93 out of 5) with a $92.50 target price, nearly 30% higher than where it’s currently trading.
It’s down but not out. It’s time for Nike to just do it and fix its business.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
