UAA – Fill The Gap?

I bought UAA March 31st 23.5 calls this morning on the dip.

For me to get involved, I need to feel like I have two edges.  In this case, I feel that the technical setup is looking a bit better and the IV level is about as low as it gets.

Let’s start with the technical setup:

Looking at a 30-minute chart, we see that there is an interesting bull pennant that formed and we are breaking out of it:

uaa-1

Chart from FreeStockCharts.com

I see some buyers of the dip, and the key move now is if we can get a buyer of the rally for a bigger breakout, we may get some bigger momentum.  In particular, if we can get a move above the post-gap high, we may start to get into a vacuum with limited sellers.

On the Daily chart, we can see that there was a gap down on earnings, and the high since that date is $22.20:

UAA 2.png

Chart from FreeStockCharts.com

There’s also a tendency for technical traders to look for stocks to “fill the gap.”  For this to occur, the price will need to rise to the January 30th low of $28.74.  That gives a lot of room to run in this stock if we start to fill the gap, so I’m intrigued.

Now we’ll move on to my second edge – Implied Volatility:

On the volatility side, we have a very low IV level after earnings, and it’s about as low as we’ve seen in the stock:

UAA 3.png

UAA 4.png

Charts from LiveVol

This is a good sign for me.  I don’t see a strong reason for IV to drop much below 30% and I think the upside is to around 35%.  I also want some time as we may chop around this post-gap range for a couple more weeks – we may run immediately, in which case I would have been better in shorter duration calls, but I want some time to let the story play out.  And with IV cheap, I can get more time and leverage without spending a lot of money.  If I’m right on direction but it takes time, the IV may drop to 29%, but I’ll make enough on my long delta that I’m not concerned about the IV dip of 1%.

So, I chose the March 31st 23.5 calls for 0.27 this morning – I get a lot of leverage (on a run to 28.74, these would be worth $5.24, although I’ll be adjusting or possibly closing out my trade before that kind of move). I am positioned in calls with a strike at the lower end of the gap.  If we start to fill the gap and run through my strike, I’ll want to roll these up to get some more leverage, but in the meantime, I have a lot of leverage for a cheap play.

There’s a lot more nuance to the strike selection that I won’t get into here as this is just intended to give a sense of the main part of the setup, but the key here is feeling that I have 2 potential edges: the technical setup and the low IV.  And those give me confidence to look for a leveraged play.

 

 

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