It’s time for bulls to support Under Armour Inc (UA). Following a game winning earnings report and corrective move, investors can now take a more confident vertical step back into UA stock. Let me explain.
Under Armour hit a three-pointer Thursday morning, announcing a modest top and bottom-line beat and further surprised the Street by guiding fiscal year 2016 revenue growth to 25% and above consensus views.
Following the report, brokerage B. Riley upgraded UA stock from “neutral” to “buy.” At the same time, CNBC’s James Cramer cautioned short term, but said not to bet against UA stock and Under Armour CEO Kevin Plank in the long term.
Meanwhile, BB&T Capital Market’s Corinna Freedman noted the firm isn’t a bear on Under Armour, rather it’s concerned UA stock is experiencing a relief rally and has gotten ahead of itself based on the company’s fundamentals.
And away from the cameras? Investors, with some likely help from heavy short interest, rocketed UA stock higher by about 22% Thursday.
UA Stock Weekly Chart
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The low in the hammer candlestick is significant, as it follows a deep corrective move of 40% and a reset of a high-base count.
Both factors support technical evidence for a meaningful bottom in UA stock, which in conjunction with the weekly hammer confirmation, appears in place.
UA stock bulls blindly jumping in, however, should be concerned about the potential lack of broader market support as UA teeters within its own still questionable correction. Wednesday’s bullish gap and thrust in UA stock does make shares prone to some backing and filling — particularly so in lieu of the overall fragile market condition.
Under Armour Stock Options
Since the broader market doesn’t have the same sentiment as UA stock bulls, a continued full court press in UA stock is considered unlikely. Therefore, an out-of-the-money bull put spread is the way to go.
Reviewing UA stock’s options board, the Feb $75/$70 bull put spread for a credit of 50 cents or better is attractive. Compared to UA stock’s current price of $84.05 the trader collects the full credit if shares are above $75 at expiration in February.
Currently, the stated spread price is the offered price so an actual fill is likely to require a bit of price weakness in UA stock estimated at 2% to 3%.
If filled, a breakeven of $74.50 is at a healthy discount of more than 11% from Thursday’s close in UA stock and comes with peace of mind in the form of a guaranteed stop loss at $70.
The max loss for the UA bull put spread is contained to $4.50 which is simply the difference between strikes minus the credit received.
With the spread risk less than 6% of the UA stock price — and given shares of Under Armour would have to decline by more than 17% to realize that type of loss — the vertical becomes increasingly compelling in our opinion.
The UA stock vertical also allows the longer-term stock traders to effectively take a long position in UA stock for a max premium of $4.50 or roughly 6% over UA stock if it trades below $70 and fills the earnings price gap.
Bottom-line, that’s a solid trade for an individual playing for ‘da Bulls in UA stock!
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.
