by Tyler Craig | April 23, 2012 11:04 am
With the help of Friday’s earnings beat, Under Armour (NYSE:UA) was able to break out above a key resistance level that had previously stymied all previous advances. The surge to new all-time highs was also accompanied by much higher-than-average volume, which provides evidence the breakout is likely to hold.
Since the post-earnings volatility crush has already taken its toll on UA options, implied volatility looks relatively cheap. In an environment such as this, option-selling strategies look less appealing (as premiums are smaller) while option-buying strategies appear more appealing (for the same reason). Although more optimistic traders may be eying a straight call option buy, the choppy broader market would lead me to favor a more conservative bull call spread.
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While May options are likely a bit too close to expiration for comfort, June or July should provide adequate time for the vertical spread to come to fruition. Remember, the bull call spread consists of buying to open a lower strike call while selling to open a higher strike call of the same expiration series. The max risk is limited to the initial debit paid while the max reward is limited to the distance between strikes minus the net debit.
Of the UA strike prices available I like purchasing the 100-strike call while selling the 105-strike call. Since June options just debuted this morning (April options just expired), they have been initially priced today.
Currently, the June 100-105 bull call spread can be purchased for $2.40 (purchasing the 100-strike call for $5.30, selling the 105-strike call for $2.90).
The max risk, then, is $240 and will be incurred if UA sits below $100 at June expiration. The max reward is $2.60 ((105-100) – 2.40) and will be captured if UA rises above $105 by June expiration.
The same spread in July is priced for $2.50 (buying the 100 call for $6.90 and selling the 105 call for $4.40). This strategy gives an extra month until expiration with a max risk of $250 and a max reward of $250.
The potential monkey wrench that could sabotage UA’s beauty of a breakout is the recent spell of weakness that has caught hold of the broader market. With the S&P 500 Index gapping down more than 1% on Monday morning, it would be wise to see if UA is able to hold strong in the face of the selling. Assuming that’s the case, traders should have a green light on the suggested bull call spread.
At the time of this writing, Tyler Craig had no positions on UA.
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