Tuesday morning, Argus upgraded Nike NKE shares to a “buy” from a “hold” rating, setting a 12-month price target of $82. The firm believes the athletic apparel giant is well positioned to outperform its competitors and deliver solid earnings growth. Speaking of outperformance, the stock showed notable relative strength in Tuesday’s session, moving higher in a broader market that was sinking across the board.
For bullish investors who don’t want to simply buy shares, there are many alternatives from the world of options trading. The same holds true for those who don’t agree with Argus’ sunny disposition. Two hypothetical options trades on the stock – one bullish, one bearish – are outlined below. Remember these are merely examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.
*Prices given as of Tuesday afternoon. NKE is trading at $71.69
Bullish Option Strategy: Bull Put Spread
Investors who feel Nike has intermediate-term upside (or at least consolidation potential) from here could sell out-of-the-money bull put spreads in the October series. The October 70/55 put spread is currently priced at a net credit of $4.15 (when selling the 70 put and buying the 55 put). If NKE is still trading above 70 when October expiration rolls around, the trader keeps the $4.15 credit as profit.
The maximum loss, meanwhile, is limited to $10.85 (the difference between strike prices minus the credit) and occurs if NKE has plunged all the way below 55 by expiration. (Of course, the investor can exit the spread at any time by buying it back to close). Breakeven for this strategy is $65.85; if NKE is trading anywhere above this level on expiration Friday, the spread will be profitable (excluding commissions).
Bearish Option Strategy: Synthetic Short Stock (Split Strikes)
Traders who think Nike is running out of steam could trade the synthetic short stock strategy, which has a similar risk/reward profile to a short stock play. Simultaneously buy the January 62.50 puts for $4.65 and sell the January 80 calls for $4.55, paying a net debit of $0.10 per synthetic spread. If NKE is trading between these strikes when January options expire, losses are capped at this debit paid.
Outside of these strikes, however, losses are theoretically unlimited above $80 and the reward is significant below $62.50 (capped at $62.40 in the unlikely event that NKE falls all the way to zero). Due to the dramatic nature of these synthetic short trades – unlimited risk, nearly unlimited reward – these need to be managed with caution.
Compare the OptionsHouse rates for stock options with other brokers. For investors who are new to options and want to try out their trades without committing real money, practice using a free virtual trading account.
Photo Credit: sling@flickr
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