Pairs trading is a market-neutral strategy that involves buying one asset while shorting a related asset to profit from temporary pricing divergences. Typically, traders select two highly correlated assets — such as stocks, commodities, or currencies—that usually move together, like competing companies in the same industry (e.g., Ford and General Motors). The approach assumes that any temporary spread between the two prices will eventually converge. Many traders use this short-term strategy to exploit price fluctuations, as seen with firms like Renaissance Technologies. Alternatively, a long-term, fundamental version of pairs trading involves identifying a company better positioned to outperform its peer, going long on the anticipated winner and short on the loser for potential long(er)-term gains. Pairs trading involves speculating on both the long and short sides, aiming to be less affected by overall market movements and more resilient to volatility. Regular readers may recall that I outlined a pairs trade between Nike (short) and Lululemon (long) in October of last year using options that expired on December 20th, 2024. Over the 57 days of the trade, Lululemon outperformed Nike by 29.5%. Not bad for less than two months. That outperformance continued through February 7th this year, but at that point, something interesting happened. Citibank downgraded Nike to neutral from buy on tariff concerns. Oppenheimer raised their price target on Lululemon, and on February 9th, Super Bowl Sunday, after losing market share to competitors, Nike advertised at the Super Bowl a 60-second spot featuring the likes of WNBA sensation Caitlin Clark and triple grand-slam Belarusian tennis player Aryna Sabalenka. Did the Citi and Oppenheimer analysts get stung by the “commentator’s curse”? Was it the $16 million Superbowl commercial? As inspiring as a Superbowl commercial can be, despite featuring “Whole lotta Love” by Led Zeppelin, the ad wasn’t loved by everyone. Whatever the cause, Nike picked up the pace — big time. Since February 7th, Nike has outperformed LULU by an astonishing 26%. NKE 1M mountain Nike, 1 month So the question for us now is whether CEO Elliott Hill will reclaim the company’s top spot, returning to the roots of Nike’s success and betting on campaigns featuring the biggest names in sports. Or is the enthusiasm overblown? Should one once again “strap on a pair” and short Nike and get long one of the upstart competitors that have recently been taking market share? New pairs trade Nike is now trading 37.5x forward earnings estimates, while Lululemon is trading ~ 23.7x. However, another recently hard-hit footwear and apparel company is also starting to look more compelling in valuation — Deckers Outdoor Corp , which owns Hoka. Hoka running shoes have a tiny market share relative to Nike, but they’re growing fast. Hoka sales increased by ~35% year over year through late 2024%. That has helped propel Decker’s sales growth, which rose by 19.5% YoY for the trailing 12 months that ended December 31, 2024. Perhaps more interesting, Deckers is trading 23.7x FY2026 estimated earnings (the company’s fiscal year ends January 31st, so we’re in FY26 already). So, to summarize, Nike expects no net sales growth over the coming 12 months but is trading > 35x forward earnings estimates. Lululemon is trading 23.7x forward earnings with ~8% anticipated sales growth, and Deckers is also trading ~ 23.7x forward earnings with 11% anticipated sales growth. In pairs trading, we generally like to buy the “best” of breed and sell the “worst,” which leaves us with long DECK and short NKE. DECK 1M mountain Deckers, 1 month There is one additional wrinkle, though. In the near term, Nike has more technical strength, and Deckers has more technical weakness, and there is an unfilled gap from Q1 2024 down to $130. As a neutral to bullish bet, one could sell the 20 delta April 130 puts in DECK at $2.70, just over 2% of the current strike for an option that expires in 50 days (that’s a ~ 15% standstill rate of return annualized) with an 80% probability of profit as the first leg of the trade. I would generally favor a credit trade in Nike as well. Still, the company reports earnings on March 21st, and the company’s share price has experienced some double-digit earnings-related moves in recent years. The options market implies the stock could swing 7.5% when they report. One could use a 1×2 put spread to make a bearish bet, buying one April 80 put and selling 2 April 72.5 puts to make the bearish bet on Nike. By selling two puts one is betting the stock falls to that short strike, but not much further, because below that strike gains will be reduced and, if the stock were to fall below ~ $66, the downside breakeven, even turn to losses however that would be testing the pandemic lows, which I view as unlikely within the next couple months. The trade: Sell 1 DECK Apr. 17 $130 put Buy 1 NKE Apr. 17 $80 put Sell 2 NKE Apr. 17 $72.50 put DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. 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