While the political ramblings often bore people because of their typical high-level nature, for athletic apparel giant Nike Inc (NYSE:NKE), Washington drama was perhaps the main overhang. Heading into the company's most recent financial disclosure, the potential impact of the Trump administration's tariffs loomed large. Fortunately, Nike redeemed itself, at least on paper. NKE stock, on the other hand, has encountered wildly choppy trading — but this kinesis hides a potential upside opportunity.
For the fiscal first quarter, Nike posted adjusted earnings per share of 49 cents, soundly beating the estimate calling for 27 cents. On the top line, the athletic brand generated $11.72 billion, jumping past expectations of $11 billion. Even better, the latest sales tally exceeded the year-ago print of $11.59 billion.
Initially, Wall Street cheered the disclosure, sending NKE stock rocketing higher. Specifically, management warned that the Trump tariffs are costing the company around $1.5 billion annually, representing a 50% jump from earlier forecasts. The leadership team identified Vietnam-made footwear as a pain point because the unit faces a 20% levy. Despite the severe challenges, the tariffs have only nibbled at about 3% of last year's $46.3 billion revenue.
However, as the euphoria faded, a digestion of the forward-looking fundamentals took place. Although some analysts — including BofA Securities analyst Lorraine Hutchinson — maintained a bullish outlook on NKE stock, the underlying company's Greater China business was the weak spot. To note, footwear and apparel unit sales in the region fell 11% and 2%, respectively.
Obviously, no one knows for sure how the trend will play out. But given growth in both segments across multiple regions, China-based sales could catch up. If so, NKE stock could potentially rise.
Betting On The Kinetic Truth Of NKE Stock Before It Becomes Static
In the financial publication industry, very few phrases are as annoying as "wait for confirmation" or similar sentiments. By the time that confirmation arrives — when kinetic truth becomes static — the opportunity may be gone. That's especially the case with debit-based options trading, when you're essentially betting on an outcome materializing.
Once that outcome occurs, it goes without saying that no one is going to pay you for the underlying "prediction."
With NKE stock, the big fundamental question is whether or not Chinese consumers will start picking up the slack. Outside of intensive, on-the-ground market research, there might not be a way to reliably extract this information. However, on the quantitative front, NKE stock enjoys a probabilistic edge.
Using pricing data going back to January 2019, NKE exhibits roughly coin-toss odds when it comes to the exceedance ratio between NKE's projected closing price and its anchor (starting point). From the first week to the tenth, the exceedance ratio ranges from 46.7% to 51.2%.
However, in the trailing 10 weeks, NKE stock has printed a 3-7-D sequence: three up weeks (defined as the return between Monday's open and Friday's close), seven down weeks, with an overall downward trajectory. When this sequence flashes, the exceedance ratio for the aforementioned time period improves to a range between 51.4% and 59.5%.
Moving from the frequentist dimension to the magnitude side, the median price of outcomes associated with the 3-7-D sequence in the fourth week rises about 2.5% above the anchor. This period approximately coincides with the options chain expiring Oct. 31, setting up an intriguing contrarian wager.
Essentially, as a baseline condition, expectations for kinesis in NKE stock is muted. Indeed, implied volatility for the Halloween options chain is quite low. However, I believe this is a misreading in that historically, distribution-heavy sequences in NKE tend to bring out buy-the-dip sentiments.
A Quick Scalp On The Table
Based on the intelligence above, aggressive speculators may consider the 70/71 bull call spread expiring Oct. 31. This transaction involves buying the $70 call and simultaneously selling the $71 call, for a net debit paid of $47 (the most that can be lost in the trade).
Should NKE stock rise through the second-leg strike price ($71) at expiration, the maximum profit stands at $53, a payout of nearly 113%. Breakeven lands at $70.47, which is about 1.8% above the time-of-writing price. Evidence from past analogs suggests that this is very much a realistic target.
Those who want a little more time cushion may consider the same 70/71 bull spread geometry but for the Nov. 7 options chain. This trade gives you an additional week for NKE stock to rise above key thresholds and the max payout is 100% — which isn't a bad tradeoff for the extra peace of mind.
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