Dan Passarelli is an author and the founder of Market Taker Mentoring LLC, the home of personalized, one-on-one options education.
Under Armour, Inc. (NYSE: UA) looks poised for a sell off. Following a flag-pattern breakout after earnings at the end of January, UA has continued higher. But it is now showing signs of technical weakness with a gap to fill in the $54 to $55 a share range.
The way to play a rout in UA is by buying the UA March 65 Puts. With implied volatility low to fair, option-buying plays make sense. An outright long put especially makes sense when looking for UA to get down to the gap area left by the earnings pop. Big moves are best played with out-right, single-legged strategies such as this one.
But, more advanced traders can look at this as a potential two-part trade. If, in fact, UA begins heading lower shortly after the trader buys the March 65 puts, an opportunity may arise to sell the UA March 55 Puts to leg into a spread. Right now the March 55 puts are too cheap to sell as part of a spread, but if they rise to 50 cents bid or better, they make for a nice sale to complete the spread.
Dan Passarelli of MarketTaker.com writes the Market Taker Edge options newsletter. Dan has more than 17 years’ experience in the options industry as a market maker, Options Institute instructor and author of “Trading Option Greeks.”