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Tis’ the Season for Stocks in This Sector

Tis’ the Season for Stocks in This Sector

The holiday season is a time of traditions. There are trees, songs and decorations that many families gather around. But, families will also be in stores and that makes it a potentially important time to invest in the stocks that can benefit from that, including retailers.

Analysts at TheStreet noted,

Foot Locker’s (NYSE: FL) positive results from its third quarter and continued confidence in expansion is bolstered by a strong connection to a potentially resilient Nike (NYSE: NKE) .

Shares of both companies were rising shortly after the news but FL looks more promising to many analysts and traders.

FL daily chart

Benefits From a Partnership

“FL remains our favorite way to play Nike’s resurgence in North America, while we view concerns over Nike’s shift to a direct strategy as overblown,” Jefferies analyst Janine Stichter wrote in a note on Wednesday.

“Management’s commentary around the strength of their relationship with NKE should help to quell some fears [about Nike’s DTC push].”

She noted that she expects the two sports retail giants to continue collaborating as the direct to consumer strategy at Nike encounters further problems.

Stichter raised her price target from $60 to $62 per share on the anticipation of further growth.

Nike currently represents 67% of Foot Locker’s sales which puts the supplier well ahead of secondary partner Adidas in terms of vitality to the continued success.

A Positive Sign For Investors

The the collaboration with Foot Locker’s key partner is set to expand.

“Close collaboration with Nike allows us to deliver incredible and distinct products, services and experiences that are relevant to the consumers we serve,” CEO Dick Johnson said in his statement explaining the company’s pursuit of youth consumers.

Johnson highlighted the company’s Nike Pro Athletes program as a sign of the stronger ties between the companies.

“These Foot Locker associates who have been trained by Nike to be deeply knowledgeable and passionate about the Nike brand and premium products allow for an even more immersive customer connection and drive elevated experiences at Foot Locker,” he explained.

“They are delivering measurable results with incremental sales gains at stores where this program has been rolled out.”

Johnson also noted the company’s “House of Hoops Courtside” mobile pop-up shop that provides exclusive launches from Nike to consumers and its new 25,000 square foot Jumpman store in Los Angeles, which marks a co-investment with Nike’s Jordan brand.

The increased momentum and co-investment alongside its biggest partner should serve to bolster the company’s sales in quarters to come, according to analysts.

“The company’s collaborations and exclusive products and experiences are allowing it to capitalize on strong demand for athletic apparel and footwear,” Cristina Fernandez, senior research analyst at Telsey Advisory, wrote in a note.

Fernandez maintained her “Buy” rating for the stock and set a $60 price target, up from her previous $58 per share estimate.

That said, reliance on Nike for about two thirds of sales is certainly a concentration risk.

“The overwhelming reliance on premium Nike sneakers, especially premium basketball, concerns us as our channel checks and observations point to a slowdown in basketball footwear sales,” Cowen analyst John Kernan wrote.

He added that while Nike’s direct to consumer strategy has stalled so far, the planned move to this business model hampers Foot Locker’s ability to grow.

Kernan set a $56 price target and a “Market Perform” rating for the stock based on the concentration risk.

The company has highlighted its plans to expand partnerships with companies like its number two partner Adidas, but this concentration risk certainly poses a problem should Nike encounter any snags.

The stock does have significant room for recovery.

FL weekly chart

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for FL

For FL, a bull put spread could be opened with the December 21 put options. This trade can be opened by selling the December 21 $55 put option for about $3.50 and buying the December 21 $47.50 put for about $0.80.

This trade would result in a credit of $2.70, or $270 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $7.50 ($55 – $47.50). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $480 ($750 – $270).

The potential gain is about 56% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.