Under Armour Earnings Play Using Options

• Posted by Greg Harmon
• on July 25th, 2011

A host of companies report earnings between the close tonight and tomorrow’s open. The one I am looking to trade is Under Armour (ticker: $UA). Coming into earnings Monday night it is bouncing off of support at 77.80 with further support at 76.90 and 75 as shown in the chart below. The

Under Armour, $UA, Daily

Relative Strength Index (RSI) and the Moving Avergae Convergence Divergence (MACD) suggest more downside in the short term. But there is also an intriguing pattern the last 5 days with a large body white candle with hardly any shadows, followed by four small body red candles all within the body of the white candle. A strong advance and softer pullback Also a potential Three Rising Methods pattern if it were to culminate with a large move upward. But that may be getting ahead of ourselves. Below the three support lines there is additional support at 70.80 and 70 as well as the 50 and 100 day Simple Moving Averages (SMA). The weekly chart is what gives it a longer term upward bias. Note the bull flag at 80 with support lower at 71.

Under Armour, $UA, Weekly

This potential for a short term pullback but near support and a longer term upward bias points to a trade in the options market.

Trade Idea: Buy a Sep 85/95 Call Spread Funded by Selling 2 Aug 70 Puts

Buying the September 85 Strike Call and selling the September 95 Strike Call costs about $2.30. This can be reduced to near zero by selling either 2 August 70 Strike Puts or 1 September 70 Strike Put. I am choosing the August Puts as they have greater implied volatility and they expire sooner, This trade is not for everyone. It will take some margin as you are short two puts. I am willing to own $UA at 70, making this a potential winner for me two ways.

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