In this report, I take a look at Under Armour. Under Armour has currently fallen under investigation of its accounting practices by the SEC. The company price stock has fallen significantly since the announcement. It seems to be currently sitting at $17 and is awaiting for the final results of the investigation. This will lead it to two possible outcomes, (binary outcome) either UAA will sink dramatically or rise back to its previous prices.
In order to know which way to buy, we can look at the Charlie and Jamie trading strategy. Their strategy is doing many mathematical equations and using models such as the Black-Scholes model to help form an opinion on the share price and to purchase wrongly priced option contracts. This is much more profitable compared to buying regular stock outright which helped turn their profits tenfold.
The image above represents the payoff you can earn by purchasing options. This pictured graph shows how the premium is the price of the contract, and as the price of the stock goes up, the return on the option increases greatly. This would be the same for puts, as the point of increase would simply mirror over the x axis and as the stock price goes down, profits increase.
Using the Black-Scholes model it was calculated that the call option price for January 15th, 2021 at $30 was $0.45 per contract. Taking a look at Yahoo finance the current calculated price is $0.63 per contract. This means the current contract price is over valued. Doing the same calculation for the put contract at $10 on the same day, price his $0.45 per contract while Yahoo has the contract at $0.49. These differences could have a few variables that greatly change the outcome of the calculated price. The most volatile variable is likely to be within the sigma, due to its difficulty to efficiently and accurately calculate.
To test the volatility, we will find the volatility of 4 call options at 20, 22.5, 25, and 30. Using the average of the sigma for all for it was calculated to .4385. This is different compared to the .3859 calculated from the standard deviation of the daily returns.
The best way to have a better understanding of what is likely is to take a further in depth analysis of the company. Going through company official history and a deep analysis of each financial statement can also help. UAA is in a very competitive market, so analyzing competing company success can also paint a picture as to the possibility of financial statement fraud.
Assuming the company were to pass the investigation, UAA would certainly increase. Upon choosing the $30 call at .67 cents would require for the stock price to hit $30.67 by January 15th, of 2021. the break even is the price of the the strike price plus your contract price. In theory, if the price were to hit the breakeven price, a profit of $1 would be made for each cent it goes up after the $30.67 mark. So if the price were to hit $31, you could sell it for $100, giving you a $33 profit.
In my recommendation, investigations do seem to happen a lot, but I do not foresee any type of downfall of Under Armour. Assuming the price of the stock doesn't fall, the price will certainly increase and will not sit at the current price it is at. A $67 investment isn't that heavy of an investment and can certainly prove to become a solid return. Although the stock hasn't hit $30, it has an entire year to develop and with a small investment, you could turn it into a for heavy profit.