Under Armour Inc (NYSE:UAA) is not outrageously expensive, but it has its fundamental disadvantages. The financial media compares it to Nike Inc (NYSE:NKE). To that, UAA is half as profitable and offers no dividends. So investors who want to buy one retailer would on paper opt for the easier trade, which is Nike.
However, theory is not always the entire reality. Both stocks have had a recent rally. Technically UAA stock is a little more attractive. The woes that brought it down so fast now offer an attractive opportunity of a snap-back rally.
The large chasm that the January earnings created now offers that opportunity. Markets often like to close open gaps. This is not a rule, but it happens often enough that it becomes like a self-fulfilling prophecy that is worth chasing.
Click to Enlarge Recently, UAA stock has rallied on the Golden State Warriors’ performance in the NBA finals. This is ridiculous, but it counts as part of the price action. I don’t chase these pops by buying the hope. Instead I would sell downside risk below levels that are proven support to create income.
Furthermore, theorizing that a price gap would be filled is even more hopium than conviction. This is not based on solid homework, so I don’t want to risk $23 per share without any room for error — especially since Under Armour stock has already had a big rally to get here.
UAA Stock Trade Idea
The Bet: Sell UAA Oct $20 puts and collect $1.10 per contract or better. This is a bullish trade where I have a 70% theoretical chance of delivering maximum gains, but if price falls below my strike, I would own the shares and suffer losses below $18.90.
Since I am expecting buyers to close the gap in UAA, I will not sell opposing risk to hedge my bet. I am confident that with an 11% buffer, I can manage my risk against short-term price gyrations. Besides, I am willing to temporarily own the stock if my trade sours on me.
Selling naked puts is not suited for all investors so I can moderate the trade by using a spread instead.
The Alternate Bet: Sell UAA Oct $20/$17.50 bull put spread which has the same chances of success but would limit the risk. If successful, the spread would yield a respectable 30%. This would almost double the gains of the gap-fill UAA stock trade, and my spread would do it with no money out of pocket.
Selling options is risky business, so I risk only what I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
