There are winners and losers. But sometimes the point spread dictates betting on the underdog and wagering against the dominant side. Such is the case with Under Armour (NYSE:UAA) and Nike (NYSE:NKE), if you use a fully hedged, options-based pairs trade on UAA stock and Nike stock.
Let me explain.
How to Play UAA Stock
Some may see Under Armour as being between a “rock and a hard place”. But if you’re like me, it’s likely a better time to try on some long exposure to UAA stock.
Since topping out in early June near $25, UAA stock has been sacked on the price chart. Investor enthusiasm over Dwayne “The Rock” Johnson’s Project Rock 1 men’s training shoes, which helped launch Under Armour shares to year-to-date gains of nearly 70%, has been replaced by a corrective decline of nearly 28%. But don’t believe the bears in UAA stock.
Today’s underdog is looking game-ready to mount another offensive run. The fact is a decline like Under Armour’s is more common than not after a sprint higher. And while UAA is certainly more of a turnaround in progress following a couple years of missteps, Under Armour’s 24% bearish short interest is playing a losing game.
The other fact is shares are still up roughly 50% this year, which makes UAA stock a top performer. Moreover, the corrective action of the past couple months has put shares into a testing position of a trifecta of technical supports ranging from a 50% retracement, Bollinger Band and 50-week simple moving average. And with UAA also showing a decent secondary bullish divergence in the stock’s stochastics indicator, it’s time to suit up as a bull.
UAA Stock Options Strategy
With the right kind of technical support for a reassertion of UAA stock’s uptrend to emerge — but also acknowledging the bear case to a lesser degree — an out-of-the-money bull call spread is a sensible way to play Under Armour long.
One favored combination of this type is the Jan $20 / $22.50 call spread. With UAA at $18.65, this vertical costs 65 cents. The placement means shares will need to rally in order for this bull to see a profit. Still, given we’d rather not see the recent low fail and risk trimmed to a well-contained 4%, that’s a smart approach.
On the upside, with earnings on the horizon later this month, a maximum profit of $1.85 could be well on its way to being captured.
The Retail Athletics Half-Time Show in NKE Stock
Don’t get me wrong. I’m not a Nike stock bear. Nike is truly one of the greatest brands of all time. And the company has continued to make the right business moves during a seismic shift in how things are sold. This has helped secure its market-leading domination in the retail athletics arena. But shares of Nike reflect that prowess.
Most recently, 2018 has witnessed Nike stock turn a notable corrective, cup-shaped base into a platform worthy of an Air Jordan style jump of nearly 40% in share price at its recent highs. That’s also yesterday’s news. More recently, investors have been heading for the exits and “selling-the-news” since Nike topped the Street with its quarterly results in late September.
I don’t personally expect shares to require nearly the work of the prior base before rebounding. However, with NKE’s current 14% decline working itself out in a knife-like and trend-line breaking pattern and with NKE still sporting an unsupportive stochastics setup, it’s looking like half-time for bulls in need of a rest.
Nike Stock Options Play
After looking at the Nike stock option’s board, I’m a fan of a put butterfly spread. With shares at $76.50, buying the Nov $77.50 / $72.50 / $67.50 put butterfly for up to $1.25 looks like a solid game plan.
This spread combination allows a fair bit of upside wiggle room to $76.25, while still allowing traders to profit. But if we’re correct and NKE continues to require a bit more rest, a correction down to $72.50 could result in a profit of up to $3.75 on expiration next month. That’s less than 3% and would put the total correction at 17%.
If Nike stock bulls were to get a bit more aggressive in selling their winnings, this spread breaks even at $68.75. Looking at the decent Fibonacci and price congestion in that area, that’s likely a good spot to change teams and get long. Bottom-line, rather than say, “Just Do It!” it’s time to play NKE with this options strategy.
Disclosure: Investment accounts under Christopher Tyler’s management currently own positions in Under Armour (UAA) and its derivatives, but no other securities 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 and StockTwits.
