Smart Investor: Nike, Just Do It? Here's how, using options

Over the past five years, Nike’s stock price has experienced significant movements, reflecting broader market trends and company-specific developments. Understanding these price dynamics is essential for effectively implementing options strategies.

Using long-term options (LEAPS) as a stock-buying replacement

LEAPS (Long-term Equity Anticipation Securities) are options with expiration dates up to three years in the future, offering a way to gain exposure to a stock with significantly less capital outlay compared to buying shares outright. This strategy provides leverage while controlling risk, making it an attractive option for investors.

To illustrate this strategy, let's consider a specific long-term call option for Nike, as shown in the attached screenshot:

• Trade Details:
  • Buy: January 16, 2026 Call Option
  • Strike Price: $60
  • Premium: $19.35 per share (or $1,935 per contract, as each option contract covers 100 shares)
  • Breakeven Price: $79.35 (Strike Price + Premium)
  • Max Risk: $1,935 (the premium paid)
  • Max Profit: Unlimited (potential upside)

Benefits:

• Leverage: Control 100 shares of Nike for a fraction of the cost of buying the stock outright.
• Limited Risk: The maximum loss is limited to the premium paid for the option ($1,935 in this case).
• Potential for High Returns: If Nike's stock price rises significantly above the breakeven price, the potential returns can be substantial.

Risks:

• Expiration Risk: If the stock price does not rise above the strike price plus premium by the expiration date, the option will expire worthless, and the premium paid will be lost.
• Time Decay: The value of the option may decrease over time due to time decay, even if the stock price remains unchanged.

Using LEAPS as a replacement for stock-buying allows investors to participate in the potential upside of Nike with a defined risk, making it a strategic choice for those looking to leverage their investments while managing their exposure.

In the next section, we will explore how covered calls can enhance portfolio performance by generating additional income from existing stock holdings. 

Enhancing portfolio performance with covered calls

Covered calls involve holding the underlying stock and selling call options against it to generate additional income. This strategy is particularly suited for investors who already own at least 100 shares of Nike, as each option contract represents 100 shares. Advanced users might also utilize long-term options (LEAPS) as a substitute for owning the underlying shares to implement this strategy.

To illustrate this, let's consider a specific covered call option for Nike, as shown in the attached screenshot:

• Trade Details:
  • Sell: August 9, 2024 Call Option
  • Strike Price: $78
  • Premium: $0.61 per share (or $61 per contract)
  • Max Profit: $356 (Capital Gain) + $61 (Premium) = $417
  • Breakeven Price: $73.66 (Stock Price - Premium Received)
  • Max Risk: The downside risk of holding the underlying shares, mitigated by the premium received.

Benefits:

• Income Generation: Receive a premium ($61 in this case) for selling the call option, providing additional income.
• Limited Downside Protection: The premium received can help offset potential losses if Nike’s stock price declines.
• Potential for Capital Gains: If Nike’s stock price rises to the strike price ($78), you can sell the shares at a higher price, realizing a capital gain.

Risks:

• Capped Upside: If Nike’s stock price rises significantly above the strike price, the potential gains are capped, as you must sell the shares at the strike price.
• Stock Price Decline: If Nike’s stock price falls significantly, the premium received may not fully offset the losses from the decline in the stock’s value.

Using covered calls can enhance portfolio performance by generating additional income and providing some downside protection. This strategy is well-suited for investors who are willing to sell their shares at a predetermined price, thereby capping their potential upside.

In the next section, we will explore how protective puts can manage risk by providing a safety net against declines in the stock price.

Managing risk with protective puts

Protective puts involve buying a put option for stock that you already own, acting as an insurance policy against a decline in the stock’s price. This strategy is ideal for investors who want to protect their investment while maintaining the potential for upside gains.

To illustrate this, let's consider a specific protective put option for Nike, as shown in the attached screenshot:

• Trade Details:
  • Buy: December 20, 2024 Put Option
  • Strike Price: $70
  • Premium: $3.85 per share (or $385 per contract)
  • Breakeven Price: $69.20 (Stock Price - Premium Paid)
  • Max Risk: The downside is limited to the breakeven price ($69.20) instead of the total loss if the stock drops significantly.

Benefits:

• Downside Protection: The put option allows you to sell your shares at the strike price ($70), limiting potential losses.
• Retain Upside Potential: If Nike’s stock price rises, you still benefit from the increase in value.
• Peace of Mind: Provides a safety net, reducing the stress of potential market downturns.

Risks:

• Cost of Premium: The premium paid for the put option ($385 in this case) is the cost of protection, which can reduce overall returns if the stock price does not decline.
• Limited Duration: The protection is only valid until the expiration date of the put option.

Using protective puts allows investors to manage risk effectively by providing a safety net against declines in stock prices. This strategy is particularly useful during volatile market conditions or when holding stocks with uncertain short-term prospects.

In the next section, we will explore how cash-secured puts can be used to acquire stock at a discount while generating additional income.

Acquiring stock at a discount with cash-secured puts

Cash-secured puts involve selling put options while setting aside enough cash to buy the stock if the option is exercised. This strategy allows investors to potentially acquire shares at a discount while generating additional income from the premium received.

To illustrate this, let's consider a specific cash-secured put option for Nike, as shown in the attached screenshot:

• Trade Details:
  • Sell: July 19, 2024 Put Option
  • Strike Price: $75
  • Premium: $2.32 per share (or $232 per contract)
  • Max Profit: $232 (Premium received)
  • Breakeven Price: $72.68 (Strike Price - Premium received)
  • Max Risk: If the stock price falls to zero, the maximum loss is the breakeven price minus zero ($72.68 per share).

Benefits:

• Income Generation: Receive a premium ($232 in this case) for selling the put option, providing additional income.
• Potential to Buy Stock at a Discount: If Nike’s stock price falls below the strike price ($75), you will be obligated to buy the shares at the strike price, effectively purchasing them at a discount when considering the premium received.
• Limited Downside Risk: The risk is limited to the breakeven price, providing some cushion against potential losses.

Risks:

• Obligation to Buy: If the stock price falls below the strike price, you are obligated to purchase the shares, which may result in holding a stock that has decreased in value.
• Limited Upside: If the stock price stays above the strike price, the maximum profit is the premium received, and you miss out on any potential gains above the strike price.

Using cash-secured puts can be a strategic way to acquire stock at a discount while generating additional income. This strategy is well-suited for investors who are willing to buy the stock at a lower price and have the cash available to secure the position.

In the next section, we will explore how collars can balance risk and reward by limiting both the potential downside and upside of a stock investment.

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Balancing risk and reward with collars

Collars involve holding the stock, selling a call option, and buying a put option to limit both upside and downside potential. This strategy is particularly useful for investors who want to protect their gains while still participating in potential stock price increases.

To illustrate this, let's consider a specific collar option strategy for Nike, as shown in the attached screenshot:

• Trade Details:
  • Sell: January 17, 2025 Call Option
    • Strike Price: $80
    • Premium: $1.69 per share (or $169 per contract)
  • Buy: January 17, 2025 Put Option
    • Strike Price: $65
    • Premium: $1.69 per share (or $169 per contract)
  • Net Cost: $0 (Premium received from call offsets the cost of the put)
  • Breakeven Price: $81.69 (Cost of the stock + Net Premium)

Benefits:

• Downside Protection: The put option allows you to sell your shares at the strike price ($65), limiting potential losses.
• Income Generation: The premium received from selling the call option can offset the cost of buying the put option.
• Limited Cost: The net cost of the collar can be zero or minimal if the premiums offset each other.

Risks:

• Capped Upside: If Nike’s stock price rises significantly above the call strike price ($80), the potential gains are capped, as you must sell the shares at the strike price.
• Stock Price Decline: If the stock price falls below the put strike price ($65), you are protected only down to the put strike price.

Using collars can balance risk and reward by providing downside protection while capping the potential upside. This strategy is well-suited for investors looking to protect their gains and limit their exposure to potential losses.

Conclusion

Investing in Nike (NKE) through options offers a variety of strategies to enhance returns and manage risk. By employing techniques such as long-term options (LEAPS), covered calls, protective puts, cash-secured puts, and collars, investors can align their strategies with their market outlook and risk tolerance.

These options strategies provide flexible tools to navigate market complexities, allowing for leveraged exposure, income generation, risk protection, and balanced risk and reward. Each strategy has its unique benefits and risks, making it essential for investors to carefully consider their financial goals and market conditions.

By understanding and implementing these options strategies, investors can optimize their investment approach with Nike, enhancing portfolio performance while managing potential risks.