Four-Digits Returns Await in Under Armour Inc (UA) Stock

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It’s time for investors to step up to the plate in Under Armour Inc (NYSE:UA). But instead of buying UA stock at current prices, a packaged vertical combination looks like an all-star trade to consider. Let me explain.

Four-Digits Returns Await in Under Armour Inc (UA) Stock

It hasn’t been a MVP kind of year for UA stock and its shareholders. Some of the pressure can be simply attributed to a priced-for-perfection growth story and its overly-ambitious expectations, inevitably dashed.

Competition from a resurgent Adidas AG (ADR) (OTCMKTS:ADDYY) has also been a likely unexpected hurdle that’s negatively impacted Under Armour. Of course, 800-pound gorilla Nike Inc (NYSE:NKE) is always a threat … even if UA stock’s own misery in 2016 is keeping good company.

Under Armour’s brand lost a bit of its cache earlier this year when it rolled out its all-white Steph Curry basketball shoe, which was relentlessly memed. The misstep looked more hospital orderly than basketball superstar.

But if we’re pointing fingers, the 2016 bankruptcy of Sports Authority, a key distributor for Under Armour, became an albatross for UA shareholders. And it will continue to pinch earnings for the next couple years.

So, how on earth does Under Armour rebound from here?

A still very competent management team will invariably learn from its mistakes. UA will also optimistically continue to build its brand. One big step in that direction was Monday’s inked 10-year deal with MLB to be the official outfitter for the league beginning in 2020.

There’s also UA stock’s price chart to consider. It’s our view that the rebuilding in shares of Under Armour looks well-underway and worth some bullish positioning.

UA Stock Daily Chart

12-06-16-ua-weekly-stock-chart
Click to Enlarge
Source: Charts by TradingView

As a result of UA’s aggressive retreat from 2015’s all-time-highs, shares are forming a possible double bottom pattern. Additionally, the lower-low variation is wedged between the 38% and 50% Fibonacci retracement levels dating back to UA stock’s financial crisis low.

The Fibonacci testing is good news and should help Under Armour’s hold at current levels. What’s more, an oversold stochastic and recent move into the lower Bollinger Band are hints of UA’s correction having hit a bearish extreme.

If the pattern did wind up failing, I’d estimate a test of $26.50 to $27 would ultimately result in a bottom in UA stock.

A move of this magnitude would challenge the 50% retracement level. As well, a Fibonacci two-step or mirror move completes with leg AB matching leg CD. Lastly, “hints of a bearish extreme” would probably be even less subtle during this type decline in UA stock.

UA Stock Bullish Combo

Reviewing UA stock’s options board and given what’s been discussed, a combined bullish vertical position using an out-of-the-money bull call spread financed with a bull put spread is attractive.

With Under Armour shares at $30.80, the April $32.50/$35 bull call spread and April $27.50/$25 bull put spread combination is priced as a package for just 20 cents. This UA stock combo gives sufficient time for a turnaround to emerge in the first part of 2017 and maintains an expiration upside breakeven of $32.70, which is less than 7% away from current levels.

At expiration, if UA stock is caught between $27.50 and $32.50, the trader will lose the 20 cents paid for the packaged verticals. On the upside, if a stronger uptrend were to take UA stock above $35 a share, the spread returns $2.30. That’s a whopping 1,150%!

The combo can also benefit from any interim rallies. If a bid in UA stock happens sooner, rather than later, this trader can expect profits to begin building without the bull call spread going in-the-money.

In consideration of UA’s stock chart, risk is limited to $2.70, or roughly 9% of UA stock. That’s a nice insurance policy. What’s more, that size loss would require a near 19% drop in UA to $25 a share.

It’s not a pick for everyone, but this Under Armour package looks like an all-star trade.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article but may do so after publication. 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.

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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 and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/under-armour-ua-stock-options-trade/.

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