Long-Term Bull Put Spread Provides Opportunities for NKE Bulls

Nike (NKE) has hit a rough patch recently with the stock down 56% from its all-time high. NKE is also the most oversold stock in the Dow Jones Industrial Index as measured by RSI.

NKE stock is trading at a PE Ratio of 18.39 which is well below the 5-year average PE Ratio of 40.98.

Despite encountering some recent challenges, Nike’s EPS growth forecast is expected to average 6.2% over the next 5 years.

COMPANY DETAILS

NIKE Inc. is engaged in the business of designing, developing and marketing of athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide.

With the help of a strong brand portfolio, including Nike Pro, Nike Golf, Nike and Air Jordan, it offers premium, well-designed and high-quality products, in line with the latest customer trends. NIKE is the global leader in athletic footwear, apparel, equipment and sports-related accessories.

Nike's 'swoosh' logo and 'just do it' tagline are widely recognized across the world, while its association with celebrity sportspersons, such as Michael Jordon and Roger Federer as well as top professional and college teams ensures a strong brand recall in the key U.S., U.K., Japanese and Chinese markets.

The company's products include six key categories: running, NIKE basketball, the Jordan brand, football, training and sportswear (sports-inspired lifestyle products).

NKE BULL PUT SPREAD

Today, we’re going to look at a bull put spread trade, but instead of using a regular monthly expiration, we will look at a longer-term trade.

Longer-term option trades tend to move a little slower than shorter-term trades. That allows more time to adjust or close, but also means a lower annualized return.

As a reminder, a bull put spread is a bullish trade that also can benefit from a drop in implied volatility.

The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.

Implied volatility is currently sitting at 24.33% which gives NKE and IV Percentile of 49% and an IV Rank of 21%.

When entering credit spreads such as a bull put spread, it’s better to look for a stock with a high implied volatility percentage.

To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.

If we go out to March next year, we could sell the March 21, 2025 put with a strike price of $60 and buy the $55 put would create a bull put spread.

This spread was trading yesterday for around $1.50. That means a trader selling this spread would receive $150 in option premium and would have a maximum risk of $850.

That represents a 17.65% return on risk between now and March 21 next year if NKE stock remains above $60.

If NKE stock closes below $50 on the expiration date the trade loses the full $850.

The breakeven point for the bull put spread is $58.50 which is calculated as $60 less the $1.50 option premium per contract.

That breakeven price is around 19.2% below yesterday’s closing price. 

Conclusion And Risk Management

One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $150, so we could set a stop loss equal to the premium received, or a loss of around $150.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be if the stock breaks through the short strike of $60.

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.

On the date of publication, Gavin McMaster 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.