Under Armour Inc (UA) Options Activity Spurred by Adidas Rumblings

Could apparel giant Adidas buy embattled rival Under Armour Inc (UA)?

Nov 2, 2016 at 2:21 PM
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Under Armour Inc (NYSE:UA) call options are being exchanged at more than double the expected intraday clip today, with Trade-Alert citing potential Adidas buyout interest as the catalyst. In fact, the rate of call trading registers in the high 98th percentile of its annual range, as option bulls target short-term gains.

The most active UA option is the weekly 11/4 31-strike call. All signs point to buy-to-open activity, suggesting traders foresee the athletic apparel stock muscling atop $31 by Friday's close, when the series expires. The shares are nearing that strike -- adding 1% to hover near $30.82 -- but only after stringing together a series of sharp post-earnings losses in the past week. Just yesterday, in fact, UA stock touched a two-year low of $30.06.

It's unclear whether today's gains spring from the M&A rumors or the shares' "oversold" status. At last night's close, UA was sporting a 14-day Relative Strength Index (RSI) of 19, suggesting today's solid rebound may have been in the cards, regardless of fundamental developments.

Plenty of other options players may be targeting an upside move for the stock. During the last 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 2.09 UA calls for every put. This top-heavy ratio ranks in the upper quartile of its annual range.

Alternatively, short sellers could also be hedging their bearish stock positions via protective calls. A lofty 11.7% of Under Armour's float is sold short, which would take close to three weeks to buy back, at the equity's average daily trading levels.

No matter the motivation, now appears to be a good time to purchase premium on short-term Under Armour Inc (NYSE:UA) options. The stock's Schaeffer's Volatility Index (SVI) is 35%, below 98% of all comparable readings from the past year. In other words, the options market is pricing in relatively low short-term volatility expectations at the moment.

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