Under Armour Inc (UA) has staged quite the reversal following its earnings-induced pole vault. UA gapped higher 8% in late April on a promising pop taking the stock well into bullish territory. Then it slipped on a banana peel.
Under Armour still hasn’t found its footing, with the selling frenzy reaching a fever pitch yesterday, shaving 7.5% on massive volume off of UA stock. Blame for the sudden downside acceleration lies with the unexpected news that two executives will be stepping down.
Under Armour’s stock swoon has really thrown a wrench into its chart. With its nascent uptrend having blown to smithereens recent support levels, the near-term direction for UA is a toss-up.
One thing is clear, however, Under Armour stock is oversold.
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I mean c’mon, UA is down almost 20% in a straight line. And yesterday’s volume spike reeks of capitulation.
This may not be a bad spot to start bottom-fishing if you’re looking to capitalize on its oversold status.
Get Paid to Buy UA Stock
As you might expect, the sharp drop in the stock has delivered a swift kick in demand for options. Implied volatility has risen a fair bit since its post-earnings volatility crush two weeks back. Combined with its oversold status and cheap price tag, the now inflated option premiums are making for an interesting put-selling opportunity.
Why buy UA stock outright when you can get paid to do so? Such is the thought process behind today’s trade idea.
Sell the June $35 put for 50 cents or better. The max reward is limited to the initial 50 cent credit and will be pocketed if Under Armour sits above $35 at June expiration.
If your broker holds aside, say, 15% of the stock price as the margin requirement for the naked put, the 50 cent credit yields about a 10% return.
And if you’re wrong, if UA stock continues plumbing the depths, you’re obligated to buy 100 shares per contract sold if they sit below $35 at expiration. Since you received 50 cents, however, your cost basis would be $34.50.
In timing the entry, consider waiting until the selloff shows signs of reversing.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
