Put Selling and Option Trading Lululemon Athletica Stock (LULU)

Lululemon Athletica Stock could jump either way after earnings are announced later today after the markets close. The US Option market estimates the shares may move as much as 7 percent either way when they announced their first-quarter earnings. Over the past 4 quarters, the stock has on average moved 7.75% following earnings announcements. An investor, Dan, wrote to me today and asked if I could take a quick look at Lulu Stock and tell him what I would do if I was interested in trading Lulu Stock Options against today’s earnings announcement. Here is what I think.

With Wall Street analysts neutral on the stock, short interest is at a 4 year high with almost 23 percent of the entire float shorted. The top 5 share holders hold 63 percent of Lululemon Athletica Stock so this amount of short interest is exceptional.

Lululemon Athletica Stock Chart

The last 6 months of Lululemon Athletica Stock are shown below. I have marked the key aspects of the chart.

A. show the most recent intraday all time high for the stock.

B. shows that despite the recent up move MACD is negative on the stock and still shows it as a sell.

C. Momentum over the past few days has fallen off but it is now positive.

Lululemon Athletica Stock June 10 2013

The Lululemon Athletica Stock chart should be indicative that the stock has a better chance to fall than rise with earnings or even after earnings announcement.

Straddle and Strangle Strategies

When an investor is unsure which side to take (up or down) often the best choice is a straddle (same strike put and call) or strangle (different put and call strikes) one to three months out. Then when the stock turns one way the investor can hold the options that are gaining profit and close the other side of the trade. For example should LULU Stock move up, the investor would hold the call side and close the put side. If LULU Stock moved down, the investor would close the call side and hold the put side.

Straddle and strangles make a lot of sense but they can end up limiting profits due to the cost to close the non-winning side and if the rise or decline in the stock is not enough to even cover the cost of the option bought.

Put Selling LULU Stock After The Earnings

I often find that when a stock like LULU Stock announces earnings, the day after makes for an interesting Put Selling trade. Therefore at the open on Tuesday, investors may want to quickly check the option prices for puts and sell those puts that they are interested in shorting and would pick up stock if assigned shares.

Put Selling Lulu Stock Before The Earnings

To put sell before the earnings means looking at the LUL Chart and see where support, even light support, may lie in the stock. If the move lower is expected to possibly be as much as 7 percent, that would take the stock back to around $76. Looking at the chart you can see there is good support at $75 for Lulu Stock and should it fall lower in the days after the earnings are released, a roll down to $72.50 means lowering your puts into the top of much stronger support levels.

lulu-stock-put-strikes

June 14 Put Strikes

The put strikes for June 14 options are below as of 2:30 PM. You can see that the $75 is paying almost 1% and the $72.50 has a lot of buyers. Obviously those buying the $72.50 figure that the premiums may double if the stock falls back to $75.00. A very nice and quick way to double your capital spent.

Lulu Stock june Put Strike

For Put Selling the $75.00 certainly looks intriguing.

June 22 Put Strikes

The June 22 put strikes are even more enticing. The $72.50 at .56 cents is certainly worth looking at when considering the stock chart above. The $75 has better than 1% premium, making it also quite intriguing.

Lulu Stock June 22 2013 puts

Lulu Stock Opportunity Summary

While Lulu Stock does not meet my criteria, I know a lot of investors love to trade Lulu Stock Options. The earnings announcement after the close may make this one of the more interesting stock option trades this month. If I was trading options against Lulu Stock, you can see that I am on the side of the puts. I don’t believe Lulu Stock will move a lot higher from here and even if it should push up, Put Selling the stock I think may hold the better profit. Remember though you always trade at your own risk and Lulu Stock is not one that I have ever traded.

Thanks to Dan who brought this question to my attention and I hope he likes my answer!

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  • Fritz68

    Hi Teddi, I sold 40 x Jun 14th 75 puts prior to earnings, would appreciate any advice on how you would deal with it if LULU continues to fall (I’d prefer not to own LULU shares). Am considering rolling out and down to 70 but maybe not sufficient. Hope the AH sell off was an over-reaction. Thanks!

  • Depending on your outlook and your available capital you could consider rolling down at $70 which has more support. You could also split up your puts and roll them down and out further from $72.50 all the way to $65.00 and spread it out over time to take advantage of the panic that will happen at the outset in the morning. There will definitely be a bounce back when the stock is hit so hard so that would be the time to then buy some of them back I would think. Remember that you always trade at your own risk. As explained I do not trade this kind of stock as it does not meet my criteria of large cap stock with a dividend. My spec stock for the year is Facebook Stock and I do not do this large a quantity. Keep us posted on how you are doing.
    Teddi

  • fritz68

    Thanks a lot Teddi. I decided to roll them out one week, still at 75, hope there’s a bounce between now and then. Understand it was my own risk 100%, lesson learned on position sizing on companies I don’t want to own, overall account has taken a 25% hit (on paper), we see how it plays out.

  • It should be interesting to see. This company is not disappearing. They have growth in revenue and earnings and a huge customer base. A bounce is probably in order.
    Teddi

  • Lulu Stock continues to show growing earnings and revenue. The resignation was poorly timed on the part of the CEO and obviously in my opinion, there were probably a lot who guessed something other than the earnings was going to be announced. I would be interested to know why you rolled up to the $80 strike from the $75 strike. I think the $75 strike have a lot of potential over the next few months to see a recovery, especially into the late fall.
    You could consider splitting up your puts between a variety of strikes and work your naked put strikes lower and out of the money while still earning income from the stock. I am not expecting any kind of collapse in the stock, just weakness for a while. If this was my trade I would be tempted to reduce the number of puts through rolling forward and then use the capital released to sell puts at lower strikes. I am working on a similar article for another investor. I will post it shortly and it may help you. Look beyond the panic and to the actual earnings numbers. Revenue and earnings are decent.
    Teddi

  • fritz68

    Thanks a lot Teddi, sorry for slow reply, I just saw your post now. As I mentioned on the forum I just took the loss and got out, glad I did. Just need to move on and learn this expensive lesson about (a) selling puts on stocks I don’t want to own and (b) selling puts before earnings.

  • I can understand. Take care and if you need any suggestions just let me know.
    Teddi