Stock indexes have surged to new highs, making it hard to purchase new bullish positions. The best strategy for right now is to select solid stocks that have lagged behind the market but still have the potential to play catch up and regain lost ground.
JUST DO IT
The Rio Olympics have come and gone, and the biggest finance related news is that mega sponsor Nike (NYSE:NKE)‘s stock surged some 7% and had a reported 1,500 athletes participate in the games.
Fall football season is next on the sports calendar, and the Nike “swoosh” was on more than 60% of the college football FBS school uniforms and all four of the playoff teams last year. The leaves will soon turn and so will our attention to America’s pastime…football.
Nike has NOT been doing it yet in 2016…down a mirror opposite of the Dow Jones 6% run to record highs this year. This price pause still puts performance at PLUS 200% in the last five years.
This global icon has not played ball, lagging behind as one of the worst performing DOW stocks this year. Reward to risk favors the Bulls with this current Nike super sale.
A price jump this week to the highest Nike level in three months positions this trade for a break out of the mostly $55 to $60 sideways stock slump since April. The modest measured move objective at $65 is 10% higher.
That 10% would be a healthy return performance, but let me show you how to multiply those gains fivefold and lower the investment cost and risks at the same time.
The Simple Stock Substitution Strategy
A stock substitution strategy using options ties up less capital and limits the risk to only the premium paid. Using options instead of buying the shares also has greater staying power forlong-termm trend development.
The option contracts for January give traders more than five months plus for a bull tren to develop.
An In-The-Money option gives you the right to go long on shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A Nike long call option can provide the staying power in a potential bullish trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
With Nike trading at $59.00, for example, an In-The-Money $52.50 strike option currently has $6.50 in real or intrinsic value. The remainder of any premium is the time value of the option.
Trade Setup: I recommend the NKE January $52.50 Call at $8.00 or less. A close in the stock below $55 on a weekly basis or the loss of half of the option premium would trigger an exit.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta on the $52.50 strike call is 78%.
The January option has five months plus for bullish development. This option is like being long for the stock from $52.50 with completely limited risk. NKE has only seen three sessions in the last year of trade with the close below $52.
The maximum loss is limited to the $800 or less paid per option contract, with a stop loss exit at half of that premium to risk less than $400. The upside potential, on the other hand, is unlimited.
The Nike option trade breakeven is $60.50 or less at expiration ($52.50 strike plus $8.00 or less option premium). That stands $1.50 above the current price.
If shares hit the $65 target from the $55 to $60 channel travels, the option would be worth $12.50 for a 50%+ return on investment.
SEE ALSO: 3 Safe Stocks Yielding Over 11%