Among the world’s most recognized brands, Nike (NYSE: NKE) is currently suffering a bit of a mini-crisis. Since the start of the year, NKE stock is down nearly 30%, a reflection of rising skepticism by Wall Street that the athletic apparel manufacturer can right the ship. Although it’s possible that the upcoming World Cup could help bring some much-needed joy to stakeholders, it’s market physics that could be the better play in the near term.
It probably goes without saying that soccer’s biggest tournament — which will be held in stadiums across North America — is likely to catalyze sales and enthusiasm for Nike. While the American audience celebrates massive events like the Super Bowl, nothing compares to the grandeur of the World Cup. With Nike as the kit provider for several top-flight nations, that’s going to translate into a large chunk of consumer dollars.
When combined with the passion of global fans, along with the tournament expanding to 48 teams (rather than the previous 32 teams), that’s a lot of cash registers going off. However, before you buy NKE stock for that reason, it should bear reminding that this narrative has more than likely been priced in. After all, the World Cup didn’t just materialize out of thin air — it’s been one of the most well-publicized (and perhaps well-criticized) events on the planet.
Of course, I can’t make absolute pronouncements. However, it’s highly doubtful that professional traders and major institutions haven’t taken the World Cup catalyst into account. What’s worrying, then, is that even with the upcoming event, NKE stock is still an underperformer. In fact, over the past five years, the security is down more than 67%.
World Cup or not, Nike has not been able to address the Chinese market slump, where Greater China has historically been the company’s largest international growth driver. On a related note, rising tariffs have impacted the apparel giant by severely hurting margins. These problems may not magically disappear because of a quadrennial tournament.
So yes, there is a reason why investors are skeptical.
Volatility Skew Confirms Uneasiness with NKE Stock
Over in the options market, the usual participants — the smart money — are expressing their pensiveness toward NKE stock, as evidenced by the volatility skew. By definition, the skew represents implied volatility (IV) across the strike price spectrum of a given options chain. Since IV reflects the kinetic potential of a security at the affected strike, a higher volatility reading can be interpreted as greater demand to cover the underlying implications.
It’s an awfully confusing definition. Therefore, the skew is best expressed as an insurance market. Basically, any popular security risks moving either higher or lower on any given day. For a debit-based trader, guessing the wrong trajectory could mean heavy losses, depending on the magnitude of how wrong they are. Since nobody knows where NKE stock may head next with 100% certainty, a sophisticated market participant will hedge their position.
Now, what one individual trader may think about NKE stock really doesn’t matter. But when you multiply hedging activities at scale, the insurance policies that are being bid will tilt the volatility skew across different strike prices. This tilting effect is what clues us into what the smart money is thinking.
Granted, because no one has a crystal ball, you cannot use the skew to frame a probabilistic model of what might happen to NKE stock, just like you wouldn’t use auto insurance premiums to predict when you might be involved in a car accident. Nevertheless, the skew provides us with useful intel about the sentiment toward the target security.
In the case of Nike stock, smart money traders for the options chain expiring June 26 are willing to pay a premium for protection against catastrophic losses. Fundamentally, the key here is the positional dominance of put options relative to calls. For the strikes lower than the spot price (from $33 and lower), traders are bidding up downside protection. For the strikes higher than spot, put dominance over calls indicates that there’s relatively little in the way of upside convexity.
Using soccer lexicon, NKE stock traders are very much in a defensive formation, eschewing an offensive-related mindset to protect their own lines from being penetrated.
Why Take the Risk on Nike Stock?
Given the smart money’s pensiveness, why would anyone take the risk and buy Nike stock? The answer, as alluded to earlier, comes down to market physics.
When I say market physics, I’m not referring to a fundamental law of nature that is guaranteed to repeat. However, it’s also a fair presupposition to say that a stock’s forward distribution isn’t always consistent across all circumstances. In the case of NKE stock, it has already suffered extensively and significantly. To suffer more, there arguably needs to be more evidence to be sour about.
Again, it’s not a law of nature, but a security isn’t likely to continue falling on old news — just like it probably wouldn’t rise sharply on old news either. If the bad news is already baked into Nike stock, then there likely needs to be additional bad news for it to go lower.
That’s where I think speculative options traders can take a risk on the apparel giant. Over the past 10 weeks, NKE stock has printed only two up weeks, thereby leading to a downward slope across the period. Under this specific condition — which has materialized 20 times on a rolling basis since 2019 — NKE has demonstrated a forward 10-week distribution landing between $43 and $48 (assuming a starting price of $44.67).
Why is this significant? Because under aggregate conditions (since 2019), the forward 10-week distribution would be expected to only range between $43.60 and $45.20 (assuming the same starting point). Further, by the fifth week (coinciding with the June 26 expiration date), prices on a median basis tend to cluster around $46.
Aggressive buyers may consider the 44/47 bull call spread expiring June 26. While this trade requires NKE stock to rise through the $47 strike to trigger the 100% maximum payout, the breakeven price is $45.50 — right below the expected clustering on week five.
Another factor to consider is that Nike will release its next earnings report on June 25. A positive result here could provide an extra boost for Nike stock.
