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

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.

‍