A quick earnings steal and rebound play should have the bulls suiting up in Under Armour Corp (NYSE:UAA). But for contrarian-minded investors still concerned with a defensive game, a bullish modified fence strategy in UAA stock may be just the ticket. Let me explain.
Shares of Under Armour soared higher Tuesday by nearly 17.50% following the company’s overall better-than-expected earnings confessional. By the numbers, the former athletics apparel upstart managed to grow overall sales by 5% to $1.36 billion while dazzling with its international business as revenue jumped higher by 47%.
In all fairness to the bears, the report was far from perfect. Inventories are “very high” according to at least one analyst and gross margins did shrink by 1.5 percentage points reflecting increased discounting of merchandise.
On top of its breakeven profit result, heavy short interest in UAA stock was at least partly responsible for putting shares into alignment with a nice rebound off the court. And combined, this strategist sees the bulls as being able to retain possession of the game going forward.
UAA Stock Daily Chart
The technical picture also looks interesting in UAA stock. Again, it’s not a slam dunk. There are items like the 200-day simple moving average still potentially guarding against the bulls. It almost goes without mentioning, there’s oodles of Fibonacci levels and other possible threats that could prevent Under Armour stock from running higher.
Nevertheless, as a contrarian play I am appreciative of UAA’s technical rebound above notable lateral resistance and confirmed series of higher highs and lows. While most others will growl with skepticism at Under Armour’s price chart, it’s all the more reason to see a rebound turning into an actual bullish turnaround play.
UAA Stock Bullish Modified Fence Strategy
Reviewing Under Armour’s options, one reduced and limited-risk position which could become a slam dunk without too much effort while providing a staunch defensive line is a modified fence strategy.
One favored combination is purchasing the July $17.50/$20 bull call spread while selling the July $15/$12.50 put vertical for even money. The primary objective is for the call spread to go fully in-the-money with UAA stock rallying above the vertical. If shares cooperate and move from today’s $16.70 close to rally above $20, the trader would capture $2.50 in profit at expiration.
Secondarily, this type spread can effectively minimize risk versus simply owning UAA stock. Ultimately the downside risk with this combination is limited to $2.50 below $12.50 a share.
This feature allows investors’ intent to accumulate UAA stock on significant weakness below the put vertical with a decided advantage over a stock trader feeling the pinch of a much larger loss.
Investment accounts under Christopher Tyler’s management currently own positions in Under Armour (UAA) and its derivatives. 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.
