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Shares of Nike May Be Forming a Triple Bottom. The Best Way to Bet on a Comeback With Options

April 17, 2024
minute read

Nike's performance has lagged behind both the broader market and its sector since mid-2021. However, analysts' growth projections have recently reached a trough. Given the signs of a rebound in China's growth and Nike's valuation nearing historical lows, the stage may be set for a resurgence. Let's explore an options trade strategy to capitalize on this potential turnaround.

Nike (NKE) has established a triple bottom pattern around the $90 support level over the past three years. Recently, it rebounded strongly from this support level, indicating bullish momentum. A notable gap exists above at the $100 mark. Therefore, our short-term upside target is to fill this gap and aim for the $105 resistance level beyond.

Presently, Nike trades at the lower end of its historical valuation spectrum, with a forward price-to-earnings ratio of 24 times. This represents a 20% discount compared to its historical average and falls significantly below the 30- to 40-times range it maintained in previous years. As growth expectations begin to recover, driven by the resurgence in China's growth and the upcoming Paris Olympics, Nike anticipates a sales recovery in the second half of the year following declines.

Here's the proposed trade strategy:

Given the relatively high implied volatility rank of above 60% on Nike options, I recommend employing a vertical spread to mitigate the costs associated with purchasing upside calls. For this trade, I suggest utilizing options expiring in June and constructing a $92.50/$100 call vertical spread at a debit of $2.99.

The trade details are as follows:

Buy June $92.50 Calls at $4.53Sell June $100 Calls at $1.54With this strategy, the total risk per contract amounts to $299 if Nike trades below $92.50 at expiration. Conversely, there's a potential profit of $451 per contract if Nike surpasses $100 at expiration.

In summary, despite its recent underperformance, Nike exhibits promising signs of a turnaround, supported by factors such as the rebound in China's growth and favorable valuation metrics. Utilizing a vertical spread options strategy allows traders to capitalize on potential upside movements while managing risks associated with high option prices.

Adan Harris
Managing Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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