In an era marked by high interest rates and persistent economic uncertainty, even industry giants like Nike are facing headwinds.
With consumers grappling with the mounting pressures of rising living costs, the athletic footwear and apparel giant finds itself at a crossroads.
Nike stock is down 15% so far this year. If it continues to struggle, traders might consider a bearish trade known as a bear put spread.
A bear put spread is a debit spread. That means that we need to pay the premium to open the trade.
With Nike, a bear put spread could be set up using the 95 strike as the long put and the 90 strike as the short put for the Jan. 19 expiration.
Max Potential Gain Of $360
This trade would cost around $140 per contract, with a maximum potential gain of $360.
To achieve the maximum profit, this trade would need Nike stock to drop 10.29% between now and expiration on Jan. 19.
The break-even point for the bear put spread is 93.60. That's calculated as 95 less the $1.40 option premium per contract.
If Nike stock drops early in the trade, it may be possible to make a profit at slightly higher prices.
At expiration, if Nike stock is trading above 95, the entire spread would expire worthless. The trade would lose 100%, or $140.
Determine Appropriate Position Size
For a trade like this, I wouldn't bother with a stop loss. Either the trade works or it doesn't, so I would trade an appropriate position size in case I suffered the full 100% loss. Alternatively, you could set a stop loss at 50% of the premium paid.
As this is a bearish position, traders who think Nike stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, Nike stock is ranked No. 7 in its industry group and has a Composite Rating of 43, an EPS Rating of 55 and a Relative Strength Rating of 28.
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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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
