Looking at the surface, circumstances don’t look at all appealing for sports apparel specialist Under Armour (UA, UAA). On Thursday, UA stock suffered a steep collapse of more than 10%. The culprit? Former CEO Stephanie Linnartz – who joined Under Armour about a year ago – got the boot. Replacing the business leader is Kevin Plank, founder and former head executive.
Generally, investors don’t appreciate sudden executive turnover, especially when the enterprise in question is attempting to engineer a comeback after sustained underperformance in the charts. It also points to internal chaos. As Barron’s noted, this is Under Armour’s third CEO transition since 2019 when Plank first stepped down.
Sure enough, analysts at Exane BNP Paribas downgraded UA stock to “neutral” from “outperform.” Other research firms also cut their ratings. The message was clear: things aren’t working out so well with the business and the company has a long road ahead of it.
Obviously, the headline print doesn’t look pretty in the slightest. Nevertheless, options traders or the smart money appear to be taking a contrarian stance.
Identifying the Opportunity in UA Stock
As an everyday exercise, it’s helpful for both long-term investors and especially traders to peruse Barchart’s unusual stock options volume indicator. Primarily, this screener provides a snapshot of market sentiment. It identifies a significant shift in sentiment toward a particular stock or asset and that implies that the market has strong expectations about future price movements.
That’s exactly what happened with both UAA (Class A shares with voting rights) and UA (Class C shares without voting rights). For the former, volume reached 81,884 contracts versus an open interest reading of 100,913 contracts. The delta between Thursday’s volume and the trailing one-month average metric landed at 1,142.55%. Notably, call volume reached 17,068 contracts compared to put volume at 64,816.
For UA, total volume reached 15,289 contracts against open interest of 31,357. The difference between Thursday’s volume level and the trailing one-month average metric was 649.09%. Moreover, call volume stood at 14,253 contracts versus put volume of only 1,036. This heavy leaning toward the call end suggests a possible contrarian upside opportunity.
Assessing UA stock’s options flow screener – which focuses exclusively on big block transactions likely placed by institutions – further accentuates the different thinking process. In UA’s case, there are considerably more options with bullish trade sentiment than bearish.
Interestingly, UAA’s options flow screener reveals the opposite framework: more options with bearish trade sentiment than bullish. It’s possible (though not proven) that longer-term investors no longer feel comfortable paying the higher premium for UAA’s voting rights, especially if management is going to make surprise leadership changes like it just did.
Speculatively speaking, that makes UA stock enticing as a short-term swing trade.
Trading Under Armour: Going for the Dead-Cat Bounce
Having identified UA stock specifically as a possible short-term bullish candidate, the next step involves figuring out which methodology to use. Obviously, you can always buy the security outright in the open market. However, if you want more leverage, you can choose to acquire call options, where each contract signifies the right (but not the obligation) to buy 100 shares of the underlying stock at the listed strike price.
Since we’re interested in holding UA stock for a short while, we’ll need to consider near expiry call options. To do this, simply go to Barchart’s Options Prices screen for UA stock. Once there, select the April 19, 2024 expiration date from the pull-down menu. In my opinion, the $7.50 strike price is appealing because of the combination of the low premium (25 cents) and the fact that prior to Thursday’s meltdown, UA was trading at nearly $8.
Psychologically, this dynamic tells us that the speculative bulls will likely attempt to push the price near that level. In other words, we’re going to gamble that a dead-cat bounce might materialize.
Using Barchart’s options calculator, if UA stock makes a 3% gain in the open market between Thursday’s close and end-of-day Tuesday, this $7.50 call could be worth 30 cents. That would give us a profit of 20% rather than a mere 3%, thanks to the power of leverage.
Finishing Out the Trade
Now, the one challenge with options is that they can be incredibly volatile. So, if you make a profit, you need to be disciplined enough to secure your gains and move on. Conversely, if the trade is struggling, you’ll need to decide if it’s more advantageous to cut your losses early before time decay (since all options expire) starts eating at your contract value.
To help with this endeavor, Barchart provides its Trader’s Cheat Sheet. It identifies key support and resistance levels. For UA stock, Barchart identifies $7.29 as a key resistance level. If UA reaches this level early, you may want to consider taking your profit and exiting. Otherwise, the bears could move in and make your position less profitable or even unprofitable.
On the other end, the first support line sits at $6.77. If UA stock falls below this level, the next support comes in at $6.55. However, if shares are already struggling at these levels, you may want to cut your losses quickly as the sentiment suggests that the investment is weaker than previously thought.
Either way, the cheat sheet provides intuitive road signs that help guide you on whether you should keep moving or call it a day.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
