Investors have been at odds with under Under Armour Inc (NYSE:UAA) stock for a long while. For the past six quarters, the stock has been stuck under $22 per share. Just recently the company reported earnings and so far wall street likes what it sees.
It is now trading about 20% higher than the levels just before the earnings report. It seems that management is trying to find its way back to proper execution on plans. It will take awhile to build investor confidence, but I do see the opportunity for more upside.
Usually I like to bet on value. In this case, from the price-to-earnings ratio perspective there’s not much of that tangible. But it is cheaper than Nike Inc (NYSE:NKE) stock from a price-to-book and a price-to-revenue perspectives, so I could argue for value — albeit not from the bottom line.
UAA is the challenger to Nike, so from that sense I consider it the growth play in a global economic war — one that NKE has dominated for decades. But the fuel for today’s trade is more technical. I see a potential for traders to try and fill the giant open gap from January of 2017. I know this might be a tall order, so I will use options so not to risk my money without any protection.
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Using UAA options, I can build a moat around my risk so I’d eliminate all out-of-pocket expenses. This is a pair trade. The first will be to capture the upside potential. And the second is to finance the bet. This way if the price goes against my thesis, I would still have a chance at profits.
I am not alone in seeing the potential in Under Armour stock as it’s up 38% year-to-date which is 20 points better than NKE. Yet, most Wall Street analysts still have a HOLD rating on the stock. So this alleviates the chances of surprise upgrade headlines. It’s either that or they have to raise their price targets as price now nears their upper end of the range.
UAA Stock Trade Ideas
The Upside Bet: Buy UAA Aug $22.50/$25 debit call spread for 50 cents per contract. Here I have the opportunity to quadruple my money, and this is my maximum potential loss.
But since equity markets are nervous over the potential U.S./China tariff wars, I want to mitigate my risk and eliminate my out of pocket expenses.
The Bank: Sell UAA Nov $15 puts for 60 cents. This is a bullish trade which has an 80% odds of success.
The net result of both trades is a net credit so I am a winner already. As long as price stays above my puts then the premium I capture from selling the calls would be incremental profits. Worst case scenario, I own UAA shares at a deep discount from current price. Given the global opportunity, I am confident that I would manage out of the shares for profit in the long run.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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