Nike - Options Trade Review

I think NKE is a wonderful company. However, the underlying fundamentals and short-term earnings expectations do not support the current valuation. In this Nike options trade review, I explain my thought process as to why I have written out-of-the-money covered calls to generate options income.

This options trade is similar to my Mastercard and Visa out-of-the-money covered call options trades.

My March 21 guest post at Engineer My Freedom provides further explanation on my thoughts about NKE's overvaluation.

Nike - Options Trade Review - March 19, 2021 Expiry

In my February 3, 2021 Nike post I disclose my 5 $155 NKE March 19, 2021 out-of-the-money covered call options trade. This trade generated $0.98/share or $98/contract ($490 for 5 contracts) before the nominal commission.

The contract duration was 54 days and NKE was trading at ~$138.30 giving me a $16.70 buffer between the strike and current share prices.

$147.95 was NKE's 52 week high so to be prudent, I chose a strike price ~$8 higher than the 52 week high.

The Q2 results I used to help determine NKE's valuation reflect $1.73 in YTD diluted EPS. I double this value and added a small buffer to estimate $3.50 in FY2021 diluted EPS.

Using the current ~$138.30 share price and ~$3.50, I  came up with a 39.5 forward PE based on GAAP diluted earnings.

I also tried to determine NKE's valuation using FY2021 adjusted diluted EPS guidance from 34 analysts. Guidance was a mean of $3.02/share and a low/high range of $2.72 - $3.41. Using the high end of the range, the forward adjusted diluted PE was ~40.56. On this basis, I felt there was an opportunity to write out-of-the-money covered calls.

NKE's share price never reached the strike price before expiry so I still own the underlying shares and retain 100% of the options premium.

Nike - Options Trade Review - July 16, 2021 Expiry

NKE's Q3 results reflect $2.62 in GAAP EPS and on June 24, NKE is to release Q4 and FY2021 results. If NKE has a 'blowout' Q4 and generates $1.00 of GAAP EPS then FY2021 EPS is $3.62.

With NKE trading at ~$137 and $3.62 of FY2021 GAAP EPS, we get a PE of ~37.85.

For comparison purposes, NKE's FY2011 - FY2020 PE levels are 20.64, 21.86, 26.75, 28.62, 30.34, 22.39, 27.08, 55.74, 35.42, and 79.93; the levels in 2018 and 2020 are totally unreasonable.

The FY2021 adjusted diluted EPS projections from 34 brokers is a mean and low/high range of $3.14 and $3.00 - $3.37. The forward adjusted diluted PE is ~40.65 if NKE achieves the top end of this range.

The FY2022 adjusted diluted EPS projections from 34 brokers is a mean and low/high range of $3.96 and $3.42 - $4.99. This is a very wide range so if I use the $3.96 mean estimate versus the high estimate, the forward adjusted diluted PE is ~34.6. While this valuation is lower than the valuation using FY2021 estimates, I think NKE is still richly valued.

Yesterday, I wrote 5 $150 NKE July 16, 2021 out-of-the-money covered call options contracts and collected $1.29/share or $129/contract. This is $645 for 5 contracts before the nominal commission.

The duration of these contracts is 50 days and the variance between the current ~$137 share price and $150 strike price is $13. NKE's 52 week high is still $147.95.

Nike - Options Trade Review - Final Thoughts

This brief Nike options trade review explains my rationale for my most recent NKE out-of-the-money covered call options trade.

I could generate more premium income by going out further on the calendar or by selecting a lower strike price. However, I purposely select a short duration because the time value component of the option premium decays faster with short-term contracts; time decay works in the favour of option sellers.

In addition, my strategy is merely to skim additional income. I want to minimize the risk of being 'called away' or having to close my position at a loss. I, therefore, select a strike price that is well above the current share price.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long NKE, MA, and V.

Disclaimer: I do not know your individual circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.