If you could half your risk and maintain all the upside for a pittance would you be interested? Well read on as I’ve got a couple strategies to share with you.

The above graph illustrates how for around 70 cents you can half the downside risk of owning Under Armour (UA) for six months. If you understand risk adjusted returns then you probably agree with me that the 3% insurance is well worth paying for. Plus you can actually resell this insurance to enhance your returns.
The graph is from a couple days back when Under Armour was trading at $22.32. I have updated my underlying table with current figures and the same picture remains, i.e. tiny upside forfeit for large downside protection.

If you want to control hundreds or more UA shares then you have at least the following two choices:

1.  Buy the shares outright. The profit and loss diagram is shown above with the yellow line. Basically you make a dollar per share for every dollar move in the underlying.
2. Buy one July $25* Call for each 100 shares you wish to control and sell half as many July $25 Puts. With this strategy you enjoy dollar for dollar upside while only losing 50 cents for every dollar fall in the share price. Plus you get paid to do this, it’s a credit transaction.

I’m running out of time now, but quickly the other strategy involves buying Single Stock Futures (SSF) instead of the underlying shares. I will elaborate on this strategy is the next few days, but in summary the cost price of ownership via a SSF is occasionally considerably cheaper then buying the underlying.  Note this only applies to larger liquid issues and the current case in point in SHLD.

The reason both of these strategies exist is due to short sellers. So before employing either of these strategies your time may be better spent understanding the bear argument. Why are the shorts so confident UA and SHLD are going to fall that they are prepared to pay above the odds to short these stocks? 

This was based on UA price of $22.32. With the price at $19.75 as of publishing I’d look at the $22.50 strikes.

Related posts:

1. Taking Singles and Risk
2. Volatility vs Risk
3. Risk: Value vs Volatility
4. Daybagger Spiffy-Pop