Trade Update – Under Armour (UA): Closing May/June Call Calendar for Gain

by Dan May 1, 2014 1:11 pm • Commentary

On Monday (below) I made the case why UA was likely oversold on a near term basis in front of the company’s addition to the S&P500 on last night’s close.  As the stock approached technical support I made a short term, mildly bullish options trade that the stock would move up into the S&P add towards technical resistance at $50.  Well here were are, and the call calendar that I bought has done what it was supposed to do.  With the event come and gone, I have no strong view on UA’s fundamentals, so I am going to take the quick profit and move on.

Action:  Sold to Close UA ($50.25) May/June 50 call calendar at 1.07 for a .35 profit

While this gain is not exactly something to jump up and down about, given the minimal risk that I took at the time of execution and my lack of interest of making an outright bullish bet, its beats getting a sharp stick in the eye.

The theta on that trade is only 2-3 cents a day at this point so waiting around for the profits to get better didn’t interest us as we would need for the stock to sit right here for the next week or so in order to make a substantial difference in the price. The risk of stock failing here or breaking higher seemed to outweigh that potential, so we’ll close and take the profit.



Previous Post April 28th, 2014: New Trade – Under Armour (UA):  Protect This House

Earlier (below) I laid out the set up into UA’s add to the S&P later this week.  While the price action since the announcement has been less than stellar, and the stock is now down 15% in 3 trading days, the stock is now quickly approaching the support level that I identified this morning which also corresponds with the gap fill from Q1’s beat and raise.  To be clear, the stock trades horribly, but I now want to make a defined risk trade, that with the help of index buying, the stock re-traces a bit of the recent sell off back towards the $50 breakdown level from last week.

Trade: UA ($45.97) Bought May/June 50 call calendar for.72

-Sell 1 May 50 calls at .55

-Buy 1 June 50 call for 1.27

 Break-Even on May Expiration:

-Profits are maximized at 50 on May expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is 72 cents

Rationale:  I want to play for a move higher over the next few weeks, but do so in a way where I can finance the purchase of upside calls.  This is a fairly low premium way to make a mildly bullish play into the stock’s addition to the S&P 500 later this week and sustained move back towards prior support.  As I stated below, IV is still elevated, and playing for a bounce with outright calls or call spreads would be a hard way to make money on a tepid bounce, and a horrible way to lose on a dramatic failure.  While my trade does not have a ton of delta, it can be very nicely profitable on a move back towards my strikes.



Original Post April 28th, 2014: MorningWord 4/28/14: Under Armour’s Absorbent Gap (UA)

While social media/internet stocks, 3D printing and biotechs have all been highlighted by the financial press as bursted bubbles, there are plenty of other examples of stocks that have doubled over the last year, only to enter severe correction territory this past month.  While Facebook, Yelp, DDD and CELG capture most of the headlines, there have been some very stealthy declines (unless you own them) in some stocks with previous cult-like followings among growth investors.

Under Armour (UA) for example, had a heck of last year, from April 1st 2013 to its all time high on March 19th, 2014, the stock rose 128%, in what was a very steady incline marked by an epic blow-off breakout this past January on massive volume:

UA 1yr chart from Bloomberg
UA 1yr chart from Bloomberg

Since the highs, UA closed Friday at its lowest levels since the late January earnings gap and is down almost 23%. Last week the company released guidance that disappointed Wall Street consensus, despite seeing sales growth of 36% year over year and showing massive international growth.  But the weakness should not come as a massive mystery with the stock trading at 50x 2014 expected earnings growth of 27%, which is likely to come down a tad.  To be fair this is a very solid company, taking on some established behemoths, and taking share.  The recent share weakness has little to do with the company, their products or their strategy, it has to do with what investors are willing to pay for the expected growth.  In January, given the data at hand and the risk environment, investors were looking for growth at any price, now, less so.

I’ll make one last point, on Thursday afternoon, with the stock closing down 7.38% following its earnings report, the S&P 500 announced that the company would be added to the index on the close of business April 30th, usually an event that helps buoy the shares of the stock being added.  If the stock were to see continued weakness if the selling in high valuation stocks continues this week, it could be offer a great entry for a long trade into and out of Thursday’s add.  The six month chart below shows what could be a fairly obvious entry at $44, the breakout level in January, which also corresponds with the stock’s rising 200 day moving average (circled):

UA 6 month chart from Bloomberg
UA 6 month chart from Bloomberg

While $44 is 10% below current levels, a maybe a bit ambitious of a target entry in the next few days, the level could offer a decent level to sell premium to finance upside call purchases as it should serve as solid support in the near term.   The one year chart below of 30 day at the money implied vol shows the massive collapse in options prices over the last week, but also clearly shows it to be fairly elevated, and could come in further as the buying by indexers late in the week could be vol dampening, further making short premium trades attractive:

UA 30 day at the money iv from Bloomberg
UA 30 day at the money iv from Bloomberg

Stay tuned as we will look to make a near term bullish play if we see further weakness.