It was the perfect confluence of events for Under Armour Inc (NYSE:UAA) — a pair of bullish technical patterns ignited by the perfect financial headline. But is Under Armour really “cool” now? Does Steph Curry have that much influence over one company?
Even if he does, it may be time to bet on a reversal for UAA stock.
UAA stock surged nearly 9% on Wednesday. While the retail sector as a whole had a pretty good day, Under Armour one-upped the competition. The company announced that its new Curry 5 sneakers will release this week.
The announcement was well timed, as Steph Curry, the shoes’ namesake, is appearing in the NBA Western Conference finals.
You can’t buy that kind of advertising.
That said, another version of the Curry shoes were revealed and sold on Pi Day. Under Armour only made 314 pairs of the shoes, and while they sold out, the design was not well received. In fact, Under Armour has been accused by its own shareholders of not being cool enough.
Click to Enlarge If you want proof, all you have to do is look at the $1 billion in unsold inventory that still plagues the company. And that is still a problem even with the best advertising plan … Steph Curry can’t sell all that inventory by himself.
But the news threw a spark into an overloaded tinderbox on the technical front. UAA stock had just seen it’s 50-day and 200-day moving averages complete a bullish cross back in mid-April. Furthermore, the shares were at the back end of a months-long cup-and-handle formation. The Curry news hit the mainstream and bought in a wealth of buyers, prompting technical traders to also pull the trigger.
By the end, UAA stock has surged north of former resistance at $20 — territory the shares haven’t seen since July 2017. The problem is … well, UAA’s problems have not gone away magically overnight with a new pair of sneakers. As good as he is, Steph Curry is not the athletic apparel world’s Cinderella.
In all likelihood, UAA stock will not hold support at $20 for very long. This provides us with a trading opportunity.
Judging by June implied volatility, it’s a pretty big opportunity. Currently, June options are pricing in a potential move of about 9.5% for UAA stock. This places the upper bound at $22.40 and the lower bound at $18.50. Furthermore, most of this volatility is skewed toward calls, meaning that puts are favorably priced right now.
2 Trades for UAA Stock
Put Spread: If you’re like me, and you don’t expect UAA stock to hold these lofty heights for very long, then there is considerable profit to be made in betting against the shares — specifically with a June $17.50/$20 bear put spread.
At last check, this spread was offered at 57 cents, or $57 per pair of contracts. Breakeven lies at $19.43, while a maximum profit of $1.93, or $193 per pair of contracts — a potential return of 238% — is possible if UAA stock closes at or below $17.50 when June options expire.
Note that implieds are not pricing in a move to the $17.50 area. This spread is designed to lower the cost of entry, increase potential returns and lower the breakeven point compared to a standard June $20 put position.
Call Sell: Those looking for a more neutral-to-bearish play might consider looking into a June $22.50 call sell position. At last check, this call was bid at 23 cents, or $23 per contract. A sold call allows you keep the premium as long as Under Armour stock closes below $22.50 at expiration.
On the downside, the premium on this trade is quite low and breakeven lies just above the expected move from implied volatility. In short, the chances of getting UAA stock called away from you (or being forced to buy them at market price to fill the assignment) is higher than usual.
If you are looking to sell UAA stock (100 shares per contract) and take profits before another decline, this trade is for you. If, however, you are looking just to collect premium, I would avoid this particular strategy.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.