When it rains, it pours — just ask athletic apparel giant Nike (NYSE: NKE). While it’s a powerhouse brand within the broader pro sports ecosystem, that alone hasn’t been enough to save NKE stock, with the ticker down more than 40% on a year-to-date basis. Unsurprisingly, multiple technical indicators rate the ticker as a Strong Sell.
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What’s the issue? On the business front, Nike faces persistent weakness, particularly in its direct-to-consumer model. Further, soft regional demand has tempered demand for NKE stock. In terms of the financials, there are a number of concerning metrics, such as poor free cash flow margins and shrinking returns on capital.
Bottom line, it’s obvious people are hurting, and that has naturally cut into unnecessary discretionary spending. To top it off, Nike stock is getting the boot from the S&P 100. Mechanically, this news has imposed downward pressure on NKE, with top-tier institutions trimming exposure while rolling their money into more viable names.
At the same time, the contrarian argument is quite simple: there’s a reasonable possibility that much of the bad news has been baked into the NKE stock price. Of course, I can’t guarantee this statement. But with the sharp pullback throughout most of this year, it’s plausible to think that at least a good portion of the weak hands have been flushed out.
In that case, for Nike stock to continue plummeting may require additional bad news. Since the ugliness is already quite apparent, intrepid observers may reason that the more likely scenario — the path of least technical resistance — may be an upward trajectory.
It’s a tough call but the quantitative field could make the near-term bull case a bit more exciting.
Order Flow Imbalance May Point to a Temporary Recovery in NKE Stock
To get one thing clear, I’m not making any claims about the long-term investment picture of Nike stock. I’ll be blunt: I agree with several of my colleagues in the financial publication sector that such a broader view looks very challenging. But I’ll make a “lottery ticket” case for the near term.
What it comes down to is the order flow imbalance. In the last 10 weeks, NKE stock printed only two positive weekly sessions, thus leading to an overall downward slope across the period. Now, there’s nothing inherently special about this 2-8-D quantitative sequence, which is merely a static snapshot in time. But what’s really fascinating is what tends to happen after this signal flashes in the charts.
Historically, over the next two weeks, Nike stock tends to rise about 3.15% as a median endpoint expectation before trailing off over the next several weeks. If this observed trend plays out, the 38.50/39 bull call spread expiring Sep. 18 may look enticing.
As of this writing (Sep. 8), traders are charged a net debit (cash outlay) of $25. Should NKE stock rise through the $39 second-leg strike price at expiration, the maximum profit is also $25, a payout of 100%. It’s attractive for the most intrepid among us because of the lack of time value that you’re paying for. Because the spread is expiring so quickly, you don’t have to put so much money at risk.
Of course, the downside is that because Sep. 18 is just around the corner, you won’t have much wiggle room. This trade should only be viewed as a quick-strike gamble with money you can comfortably afford to lose.
That said, within a gambling context, the 38.50/39 bull spread is enticing because NKE stock only needs to rise about 2.36% to trigger the 100% payout. Besides, with only 25 bucks at risk per spread, you can stagger exposure to whatever you’re comfortable with.
Unfortunately, while there are many attractive elements to the transaction, it does come with a probabilistic warning.
Will Nike Stock Undergo a Random Walk?
It’s not just about the short time to expiration; realistically speaking, Wall Street doesn’t anticipate a high degree of success for the aforementioned bull spread. For example, the breakeven price is $38.75, which is assigned a probability of only 37.7%. That’s only 1.71% away, yet the odds are incredibly low.
Moreover, OptionCharts’ Probability Distribution screener rates the chance of NKE stock hitting the $39 strike price on Sep. 18 at only 31.93%. Frankly, that’s an awful forecast, giving financial experts a rational reason to stay away.
You can run an expected value (EV) calculation to better see the point, but it’s easier to think of it this way. Imagine you traded this exact setup across multiple parallel universes. You would be projected to fully win 32% of the time — and only break even 38% of the time — meaning that you risk running your portfolio into the ground.
However, the EV would run into negative territory based on a presupposition. To price the risk in options contracts, the market utilizes the Black-Scholes family of models. At the core, this framework assumes that Nike stock will undergo a random walk between now and the expiration date, with the current implied volatility (IV) serving as the constant “fuel” throughout the journey.
Basically, you’re looking at an artificial, risk-neutral construct, with randomness as its primary guiding force. In contrast, I believe in the presupposition of a risk-biased construct, with nonrandomness as the core impetus.
Looking back to January 2009, we know that the 2-8-D quant sequence has flashed 39 times on a rolling basis. Of this figure, NKE stock has exceeded the equivalent of the $39 strike 21 times at the end of the second week (Sep. 18).
As such, the conditioned, observed probability of full profitability might actually be 53.8%, not 31.93%. Granted, I wouldn’t call the former stat an astoundingly superior ratio. Nevertheless, if we were to accept the above nonrandom walk argument, the risk for this particular NKE stock call spread could be underpriced.
Caveats to Inductive Analytics
While a shift in presuppositions may lead to radically different probabilities, no one has the firm truth on the matter. We won’t know until we know — and any other statement to suggest otherwise would be pure hubris.
Moreover, all inductive analyses are subject to the black swan risk. Even if we were to observe historical patterns, that doesn’t necessarily mean they are guaranteed to repeat in the future. In this case, we may have a bit more confidence because we’re looking at nearly two decades of data. But even so, unexpected events can always materialize.
At the same time, the risk that anything can happen applies to every ticker in the equities market. Ultimately, it comes down to what argument you find most compelling. If the inductive analysis above appeals to you, then NKE stock may be worth consideration.
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