Oh, how the mighty have fallen! Under Armour Inc (NYSE:UAA), once the rising star of the sports clothing world, has returned to its humble beginnings. Blame for the round trip lies in large part with deteriorating fundamentals. UAA’s past two earnings announcements have dramatically disappointed the Street. Last month’s earnings oopsie carried Under Armour stock to a fresh 52-week low amid a harrowing 23% down gap.
With UAA stock now knocking on the door of the teens, we’re revisiting levels not seen since 2012. All told, the Baltimore-based company has seen its share price crater 62% since peaking at a lofty $54.70 in late 2015.
On the technical front, things appear equally dismal. But this shouldn’t be surprising. Any stock that just plunged over 20% on terrible earnings will have “hot mess” written all over its price chart.
Suffice it to say the trend for UAA stock is lower on all time frames. Moreover, we’ve yet to see any post-earnings rebound attempt.
It’s not uncommon for a stock to drift sideways for a spell following an outsized plunge. In fact, UAA did just that following its last earnings-induced drop (in October).
Fortunately, the options market provides numerous ways to profit from neutral price action.
The UAA Stock Contrarian Trade
Given all that’s going wrong with UAA stock these days, you can see why contrarians are probably perking up. When pessimism reaches a fever pitch, that’s when they pounce. And yet, in the absence some type of positive catalyst, Under Armour shares will likely be stuck in a rut.
Here’s where option contracts can help. Instead of sallying forth and buying UAA stock immediately, you can sell put options to obligate yourself to buy shares at a discount. And if the stock doesn’t drop any further, you can keep the premium you received up front.
With the stock perched around $20.50, you can sell the March $20 put for 57 cents. The max reward is limited to the 57 cents and will be captured if Under Armour sits above $20 at expiration. If the stock tumbles below that price, you will be obligated to buy shares at an effective purchase price of $19.43. That’s roughly a 5% discount to its current price.
If you’re a willing buyer at those levels, then allow assignment at expiration and buy the stock. If you’re unwilling to buy shares, simply close the trade if the put sits in-the-money at expiration.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.
