Under Armour (UA) screams volatility into earnings, unless it doesn't. Given the huge 20%-plus short interest and its fair share of gaps on the daily chart, one might visually conclude UA's option pricing around 8.5% for this week is on the low side. We've seen some head-scratching low option pricing recently, like Skechers (SKX) , but I wouldn't put UA in the cheap or slam-dunk category.
Examining the regression analysis provides a more definitive reason why I've come to this conclusion. Whether it be the open, close, maximum intraday move or even the change eight days after earnings, there is much in the way of predictive measurements based on earnings. This doesn't mean there won't be volatility, but what it does mean is we are more in guessing territory or a lottery-ticket style of risk vs. reward no matter what direction we pursue. (Under Armour is part of TheStreet's Growth Seeker portfolio.)
We've seen some big-time moves post-earnings, but they've been fewer than what I would have presumed. Over the past two years, we've only seen UA put up a mind-boggling number once, in my view. We have to go back more than two years to find a second double-digit move. I understand the 8.5% current pricing in terms of past moves. The average of the last nine reports turns in a closing move of 7.7%; however, that big 22.6% single-day move has a huge influence on the one-day change. When we theorize on larger-than-expected moves and the lottery-ticket strategy behind them, we need to find favorable risk vs. reward. Let's face it, most lottery tickets aren't going to pay, so when a trader pursues them, they need to be able produce big returns from the scant winners.
If a trader were looking for the big win, perhaps with an October $34 put/$42 call strangle, they'd likely be looking at a cost of $0.60, or $60, to grab the strangle. This is going to require a move over 11% on the week and likely 10%-plus tomorrow to see a profit. Even looking at the maximum intraday moves over the past nine reports, only twice has UA seen large-enough moves to turn this strangle into a sizable winner.
Expanding to five days, the results are basically the same, with two big moves about the same size as we see on the single-day change. Therefore, if we assume we'll hit with the same 2-out-of-9 frequency, then we need to get 4.5x our risk simply to break even over the long term. No one likes to break even, so I will bump the number to a conservative need of 5x. Now, we can multiply our $0.60 cost by our 5x to conclude UA needs to finish the week either over $45 or under $31 for us to even consider the trade. Unfortunately, that is a move of 18%, which has only happened once in the past nine reports.
This is when you have to go back to the drawing board, because your probability has now decreased from 2 out of 9 to 1 out of 9. I won't go through the exercise again, but when you realize you'll likely need a 10x rather than a 5x return to make an aggressive volatility play on UA work over the longer term, you might come to the same conclusion I have: The risk vs. reward does not favor any type of lottery play or even out-of-the-money strangles with legs more than 6% out of the money. Overall, this feels more like a hands-off stock in terms of directional analysis or going pure long-short in terms of volatility. I am working on an options trade with a favorable risk-reward to post on Real Money Pro later today.