It’s nearing the game-time whistle for Under Armour Inc (UA), with earnings set for Thursday morning. But should investors don UA stock for their portfolio in front of the event?
Let’s take a sneak peek at the action in UA, its options and recent earnings history to see if we can handicap whether the bulls or the bears hold the advantage going into the report.
And, of course, we’ll look for a trade idea.
Under Armour Earnings History and Reactions
In front of Thursday morning’s Q3 earnings release, the line set by Wall Street is profits of 44 cents per share of UA stock, which would be 3 cents better than the year-ago period.
Over the past year, Under Armour has beaten the Street thrice. UA topped forecasts by 40% with a 7-cent profit last quarter, and managed a pair of meager 2.5% surprises in last year’s Q3 and Q4.
On the revenue side, UA is expected to grow sales by 28% from last year’s Q3 result and bring in $1.2 billion. Full-year sales forecasts are currently estimated to grow by 26%.
In reviewing recent earnings reactions by investors, UA stock is a near coin toss with bullish outcomes of 52% immediately following the event just narrowly beating bearish price performance.
Most recently, UA stock produced a nice-sized 7.34% win for bulls last quarter, but delivered less spectacular price declines of 4.83%, 0.37% and 2.59% on a close-to-close basis over the past year.
Under Armour likely will need strong sales guidance going into the all-important holiday shopping season.
With No. 1 ranked pro golfer Jordan Spieth, NBA champion and league MVP Stephen Curry and Misty Copeland, the first African-American principal dancer with the American Ballet Theater, under contract, UA stock certainly has star power these days.
On the other hand, with UA stock’s impressive full-court press of 47% during 2015, it’s not a slam-dunk that bulls will respond favorably, regardless of what’s announced.
UA Stock Charts
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The current concern is that UA stock has been too strong for its own good and is in need of a base count reset. This would occur when UA moves through the pivot low of a developed base. In theory, the price action helps clear shares from weaker holders and paves the way for higher prices.
Under Armour currently has multiple weekly bases and subsequent breakouts in place over the past couple years. In the provided weekly chart, I’ve labeled five such bases and a sixth that’s developing right now.
Base counts aren’t the final word, but growth stocks like UA typically do come under increased pressure when the base count gets to four or higher. So, if our count of six is in the ballpark, UA stock is likely due for some profit-taking.
As price action in UA stock has contracted into a symmetrical triangle to establish its sixth base, the move out of a pattern known for generating large price swings, shouldn’t disappoint.
Under Armour Options Pricing and Trade
Option traders appear to agree, and seem to be preparing for a larger-than-normal move in UA stock. The weekly Oct 23 contracts that expire this Friday are essentially earnings “pure plays” and can help us price event risk.
Using a standard deviation calculation, the $100 strike, at-the-money implieds of 85% are pricing in a 68% chance UA stock will remain within a range of $92.30 to $107.70, with UA at $100.
The expected move up or down in UA stock works out to 7.7% by Friday’s close — a good deal larger than most of Under Armour’s recent post-earnings reactions.
The weekly Oct 23 $100/$97.50 bear put spread looks attractively priced right now. Verticals reduce risk versus owning an outright position, especially when options pricing is expensive, like what we’re seeing in Under Armour right now. In this instance, the spread is priced 61% cheaper than the UA stock long $100 put, which fetches $3.40 as of Tuesday’s close.
This bearish spread trader’s break-even is $98.70. That’s well inside the discussed volatile range pricing being estimated by the options market and amounts to downside movement of just 1.3% in UA stock.
Come Friday, if UA stock is below $97.50 (or 2.5% lower from current price levels), the trader will have a profit of $1.20, or a 92% return on the initial debit of $1.30.
The spread trader should be prepared to lose the entire nut or cost of the spread if shares of Under Armour don’t cooperate.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
