How trader is hedging Under Armour
David Russell | [email protected]
optionMONSTER's Depth Charge monitoring program detected the purchase of 3,000 November 57.50 puts for $3.50. Equal-sized blocks were sold at the same time in the November 52.50 puts for $1.40 and the November 62.50 calls for $0.90. Volume was more than twice open interest at all three strikes, indicating new activity.
The three-pronged position cost $1.20 and will earn a maximum profit of 317 percent if the maker of athletic clothing closes at $52.50 or lower on expiration. The trader will also be forced to sell stock for $62.50 if it goes above that level, which he or she may be willing to do.
UA closed at $56.62, down 1.43 percent yesterday but up more than 50 percent so far this year. Quarterly results have consistently beaten estimates, and yesterday's option trade will provide a hedge in the weeks following today's quarterly release.
The strategy combines elements of a collar with a bearish put spread. Selling more contracts than were bought lowered the cost basis but places restrictions on performance. To the downside, for instance, the trade won't make any money below $52.50; to the upside, it will relinquish any gains on the stock above $62.50. (See our Education section)
Given that UA has never traded above $61, the trader may be willing to accept that as the maximum profit range and be more worried about a pullback. (See our Education section for more on how calls and puts can help you achieve trading objectives.)
Yesterday's trade pushed total option volumes in the stock to 11 times greater than average, according to the Depth Charge.