Trendy athletic apparel maker Under Armour Inc (NYSE:UA) took a beating following its last quarterly earnings report. In fact, UA stock is down more than 20% since late October. But Under Armour shares are showing signs of life lately, and with plenty of room for growth on the sentiment front, UA stock could be in for a comeback rally.
Let’s preface this with the fact that we are looking for short-term gains heading into Under Armour’s quarterly report — slated for release the week after January 2017 options expire.
The company is still bouncing back from losing its largest seller, Sports Authority, and will continue to readjust to the shift away from the “athlesiure” trend.
In other words, guidance is uncertain and has the potential to bring about a post-earnings sell-off.
That said, UA stock has gained some momentum heading into earnings that could result in short-term gains for savvy options traders. Under Armour has bounced off support in the $25 region, and pulled its 20-day and 50-day moving averages into a bullish cross.
The only limit to UA stock’s upside at the moment lies in the $29-$30 region, which has capped the shares following last quarter’s bearish earnings reaction.
Click to Enlarge Sentiment on UA stock also supports a run heading into earnings. According to data from The Wall Street Journal, Under Armour shares have attracted 15 buys, 20 holds, and one sell rating. On the other hand, the consensus 12-month price target of $44 represents a whopping premium of about 62% to yesterday’s close. In other words, there is a high likelihood of UA stock receiving an upgrade or two ahead of earnings to match current expectations.
Options traders are heavily bullish on UA stock right now. Currently, the January 2017 put/call ratio rests at 0.43, with calls more than doubling puts among options set to expire this month.
What’s more, the potential payoff could be big, as implieds are pricing in a potential move of about 6%. This places the upper bound near $29.16, while the lower bound lies at $25.84.
2 Trades for Under Armour Stock
Call Spread: Traders looking to bank on a pre-earnings rally for UA stock might want to consider a January 2017 $27.50/$30 bull call spread. At last check, this spread was offered at 45 cents, or $45 per pair of contracts. Breakeven lies at $27.95, while a maximum profit of $2.05, or $205 per pair of contracts, is possible if Under Armour closes at or above $30 when January 2017 options expire.
Put Spread: On the other hand, buying power may begin to fizzle out if the broad-market rally meets with headwinds or analysts fail to pump the shares ahead of earnings. Traders nervous about the lack of buying power for UA stock might consider a January 2017 $25 put sell. At last check, this put was bid at 20 cents, or $20 per contract.
As with all put sells, traders will keep the premium received for entering the trade as long as Under Armour trades above $25 through September expiration. If it were to trade below $25 prior to expiration, then you could be assigned 100 shares of UA stock per contract sold at a cost of $25 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.