LULU Options Play
Lululemon athletica inc., an athletic apparel company, together with its subsidiaries, designs, distributes, and retails athletic apparel and accessories for women, men, and female youth. The company has Earnings on 6.1.2017. The company’s stock is currently trading around $48.49 in a 52 week range of $48.10-$581.81. The stock has been shown on getting crushed over the past year with shares down 22.89% over the past 12 months. I think that it has upside and LULU will rally on Earnings. To confirm this signal we will analyze the stocks historical movement record on earnings, the current expectations for movement being priced into the options market, the technical setup, and institutional order flow into the event.
First we will examine the stocks historical earnings performance record. We can see that over the past 8 quarters the stock has rallied 4 times on earnings day with an average move of 12%. This does not tell us that the stock is guaranteed to rally this quarter but it does show us that there is a slight neutral bias in the performance of LULU on earnings day. This means that as we work through the rest of our analysis will have a bullish bias.
With a sense of how the stock has moved on earnings day in the past we can calculate the expected movement for this quarter. To best isolate the expected movement in LULU we will use the shortest dated options that still contain the catalyst event. In this case we will use the June 2nd weekly expiry. To measure the market makers expected move we will need to calculate the price of the at the money straddle. We looked at the LULU $548.50 strike straddle in the June 2nd weekly expiry and it is implying a whopping $5.00 move.
The straddle is marking around $5.00. This implies an expected move of around $5.00. This implies a move of around 10.3% by Friday’s expiry. Since this is in line with the stocks historical movement record we know that there an opportunity to put on a good reward vs risk setup LULU
Upside target = $48.50 + $5.00= $53.50
Downside Target = $48.5 – $5.00 = $43.50
With these targets in mind we can look at the chart in LULU to see if trend agrees with the bullish bias, but I think the chart is bottom in LULU price action.
I think that LULU will move lower on Earnings, but I want to make sure I am getting a favorable reward to risk setup. I think the stock will move higher, but I am not sure how much
LULU Potential trade:
Buying 1 LULU June 2nd 51.5-53.5-55.5 Call Butterfly for $.20 debit
Risk: $20 per 1 lot
Reward: $230 per 1 lot
Breakeven: $51.70 and $53.30
This kind of analysis can be used to find setups like this ahead of earnings and other catalyst events.
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