Here is a bullish option tip for a popular retail stock that could bring in some cash before the holiday bills start rolling in!
A Sporty Option Tip for A Sporty Company!
Recent market conditions have resulted in many stocks forming bull flags as the markets pauses after the strong rebound from its October lows. Under Armour, Inc. (NYSE: UA), for instance, is in the process of forming a flag after breaking out from a several month long consolidation. The $80 level had been acting as stiff resistance until finally giving way a few weeks ago. UA has been trading in a very tight range since the breakout as it drifts back towards the $80 level. This is a flag type consolidation, and any breakout above this pattern could lead to a sharp rally to new all-time highs, which is the basis for this option tip.
Information about Under Armour
Under Armour Inc. (NYSE: UA) is a Baltimore-based company that manufactures and sells performance athletic apparel designed to wick sweat away from the body. Under Armour gear -- including shirts, jackets, socks, gloves, headwear and cleats -- was orginally marketed to football players, but the distinct Under Armour logo is now sported by athletes in all sports.
The company has specific lines aimed at youth athletes and women and also sells light-weight apparel for cold weather known as Under Armour ColdGear.
Under Armour was founded in 1996 by Kevin Plank, a former football player for the University of Maryland, who was looking for an alternative to the heavy, sweat-drenched cotton T-shirt he wore under his football jersey. In his first year, 1996, Plank sold about $17,000 worth of items; in 2006, the company's revenue exceeded $467 million. Under Armour gained popularity with a 2002 commercial in which a muscle-bound football player implored teammates to "protect this house!" The catch-phrase became a rallying cry for athletes, including the Baltimore Ravens, and helped propel Under Armour into the big leagues of sportswear sales alongside Nike, Reebok and others.
Under Armour became a publicly traded company in 2005 and is listed on the Nasdaq stock market. In 2007, Under Armour opened its first retail store, in Annapolis, Md.
Reasoning for the Option Tip
The company is branching into headgear and, more recently, performance footwear.
Another key initiative launched this year is “performance cotton.” The company has a huge share of the non-cotton market, but now it’s targeting cotton with its Charged Cotton line, which could nearly quadruple its addressable market.
FBR Capital reiterated its rating of Outperform for this company and changed its price target from $80 to $90.
Technical indicators for the stock are Bullish and S&P gives Under Armour a positive 4 STARS (out of 5) buy rating.
Performance of Under Armour
In the past year, the stock has hit a 52-week low of $45.85 and 52-week high of $87.40. Under Armour stock has been showing support around $80.27 and resistance in the $87.53 range.
On October 25, 2011, Under Armour reported third quarter net revenues growth of 42%, and raised 2011 net revenues and Operating Income outlook. UA made a nice move on earnings on heavy volume, which is indicative of accumulation. UA is currently showing relative strength and has supported at every test of the 10sma. It is also displaying a nice flagging pattern, which is bullish.
The flag pattern is a technical charting pattern that looks like a flag with a mast on either side. A flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trend lines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trend lines sloping.
Flags result from price fluctuations within a narrow range and mark a consolidation before the previous move resumes.
Flags are among the most reliable of continuation patterns and only rarely produce a trend reversal. The important thing to remember is that the flag pattern is characterized by diminishing trade volume.
In general, the slope of the flag should move in the opposite direction of the initial sharp price movement; so if the initial movement were up, the flag should be downward sloping.
The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction. This breakthrough should be on heavier volume to improve the signal of the chart pattern.
The reason a flag forms is that despite the strong preceding move, the stock refuses to give up any ground as it consolidates. Market participants are flocking to the stock and as a result, it trades in a very tight range. Because it is basically pent up energy, the breakout from a flag often results in a powerful move in the direction of the prior trend.
If UA can take out the 87.40 highs made on 10/31, we may see new highs on the stock.
Option Tip for Under Armour
After a high volume breakout the stock is now forming a bullish pennant, so the best option trade here for a happy New Year is buying the UA Jan 95 Calls around $3, with a target of $5.
An Alternative Option Tip
Another way to profit on this stock is to sell some out of the money (OTM) bull-put spreads. For example, sell 1 December 77.5 strike and buy the 75 strike for a net credit of $0.70, that’s risking $180 to make $70 by December expiration.
The 20dma is currently just around 78.25, and the 50dma is around 74.30. If UA breaks down at the 10sma (currently at 83), it may test support around 80.50, which coincides with previous resistance made between 9/16/11 and 9/20/11, and if that fails to hold, it should find support at the 20dma (around 78), which should be your stop loss. Anticipate a huge move down to the 20dma if we experience another huge market selloff due to problems from the Eurozone.
Another Option Tip
For a hedged play on Under Armour, look at the Jan '12 $77.50 covered call for a net debit in the $72.80 area. That is also the break-even stock price for this trade. This covered call has a duration of 79 days, provides 13.13% downside protection and an assigned return rate of 6.46% for an annualized return rate of 29.83% (for comparison purposes only).