A little more than a month ago I detailed a bullish trade in shares of Under Armour (UA). The stock had just seen a sharp decline after its mid April earnings gap higher. Aside from usual valuation concerns, the stock’s 23% decline in three weeks was curious. Since that gap higher and subsequent decline, the stock has been range-bound, trading between $35.35 and $39.35 since Mid May:
UA fortunes are closely tied to its mega-million endorsements. There is little doubt that Curry’s out of nowhere MVP last year which came along with an NBA championship, and his re-signing with UA has been crucial for investor sentiment. And Jordan Spieth’s rise offered amazing potential to shake up gold apparel in a similar way that NKE experienced with Tiger Woods a decade ago. UA still has two of the best athletes on the planets in house.
But as an investor you’d be foolish to ignore the bit of brand damage that has occurred between Jordan Spieth’s collapse at the Masters in April and now Steph Curry’s Warriors collapse in the NBA finals. It’s tough to tell whether the internet bru ha-ha over the new Steph sneakers is good or bad publicity.
But all of this adds up to a brand with a little less shine on it than a few months ago. And in some way shape or form it probably has investors rethinking whether it’s such a no brainer that UA will continue to steal share in footwear and apparel from Nike (NKE) and their international slate of athletes including NBA finals champ and MVP Lebron James.
This reason alone is causing me to re think a position that was designed to by me some time. Here was the initial trade idea & rationale from May 16th:
UA (37.20) Buy the June/Jan 40 call calendar for 3.00
- Sell 1 June 40 call at .55
- Buy 1 January 40 call for 3.55
Rationale – The idea here is to sell calls in an expiration before the next catalyst. The company’s Q2 earnings will fall in Aug expiration. If the stock is still below 40 on June expiration that means we can roll the short call another month and still not catch August earnings. That means we can get through most of the Summer whittling down that upside exposure in January. Ideally the stock creeps higher into June expiration with the ideal situation being at or near 40. The max risk is the premium spent, but the idea is playing for a large move to the upside in the back half of the year while rolling the short side of the calendar out and hopefully up, leaving us with cheap upside.
Now with June expiration come and gone, the short call strike has expired worthless. With the stock at $38.40, up about $1.30 from the trade entry, The Jan 40 call is worth about $3.35, or a tad more than paid.
So I have a decision to make. I could:
- turn into calendar again by selling a shorter dated 40 strike call
- turn into a vertical call spread by selling a higher strike call in Jan expiration
- Stay long Jan 40 call and wait to spread if the stock gets above the strike
- close the position and take small profit
To turn it back into a calendar I’d likely sell the July 40 call at 55 cents and further reduce the cost of the Jan 40 calls.
If I were to turn into a vertical I’d likely sell the Jan 50 call at 85 cents and own the Jan 40 / 50 call spread for $2.15. That’s not a horribly risk reward. Especially when you consider that a little more than a month ago the stock was $48.
I am less inclined to wait for the stock to move above strike given that it could find resistance at $40 and a rejection there could cause the position to lose serious value if it were to pull back towards support at $35.
There are a lot of good options here but I think I’ll move on and take the small profit. The weak price action by similar stocks like Disney, Nike and Starbucks spooks me a bit. These premium brands that trade at a premium to their peers and the market have lost their luster in 2016.
Lastly, UA inability to make a move back towards the uptrend could make a move retest of the 2016 lows entirely possibly on the next piece of bad news.
[caption id="attachment_64467" align="aligncenter" width="600"]
UA 5 yr chart from Bloomberg[/caption]
While Steph Curry dominated the news cycle for the last year, we’re about to see a massive pendulum shift back towards Lebron. With not a lot of near term catalysts on the horizon this stock may be stuck for a while. Therefore I’ll take my small profits and move on:
Action: UA ($38.40) Sell to Close Jan17 40 call at $3.35 for a 35 cent gain
While not what I was originally look for, it sure beats a sharp stick in the eye.