Name That Trade – $LL: Bathing in the Vertical Gain

by Dan February 24, 2015 1:57 pm • Commentary

Lumber Liquidators (LL) reports their Q4 results tomorrow before the open.  The options market is implying almost a 9% one day move which is inline with last quarter’s one day decline, but well higher than the 4% average over the last 4 quarters and of 5% over the last 8 quarters: 

I am looking at the stock for a few reasons. First the strong results and guidance reported this morning by Home Depot (HD) and Toll Brothers (TOL), second the fact that the company has no exposure to the strong dollar, and I suspect the retailer is a general beneficiary from lower gas at the pump.

LL had a fairly dramatic sentiment change in 2014 with a peak to trough decline of 55% from the all time highs in March to new 52 week lows in October.  As the 1yr chart below shows, the stock has spent the last seven and half months attempting, and just today completing to fill in its Q2 earnings gap:

[caption id="attachment_51301" align="aligncenter" width="600"]LL 1yr chart from Bloomberg LL 1yr chart from Bloomberg[/caption]

While $70 seems to be a resistance level, if the stock were to get through there is little overhead resistance until the high $70s, possibly $80.  On the downside the 2015 low of 54 made after disappointing results from KB Home in early Jan should serve as support.

MY VIEW:  with no strong view on the company’s fundamentals, but cognizant of the positive tone and results of housing related stocks today, I would suggest it would be hard to step in front of this one as the 26% short interest could fuel a massive short squeeze on a beat and raise.  That said the 21% one day decline in July on their earnings warning is a reminder of the fact that sometimes the shorts get it right.

Hypothetical Trades:

Depending on you directional inclination, the following trades look fair, but it’s important to remember just how hard it can be to make money with long premium directional bets into events with stocks that have high levels of implied volatility.  There are a lot of things you have to get right, first and foremost direction, timing and magnitude of the move.

Bullish: LL ($68.52) Buy March 80/90/100 Call Butterfly for 2.50, max gain of 7.50 at .80 with profits up to 7.50 between 82.50 and 97.50, max loss of 2.50 below 80 and above 100.


Bearish: LL ($68.52) Buy March 65 / 55 put spread for 2.50, max gain of up to 7.50 between 62.50 and 55. Max loss of 2.50 above 65.

Neither of these look great to be honest, and given the short interest I don’t love the idea of using a fly for the bullish trade. But given the fact there are only $5 wide strikes there are few trade structures near the money that make too many sense.  There are lots of challenges in this trade, I have no conviction on the fundamentals, and frankly the options are not making it easier. I will avoid, but I did think the set up from a technical set up was very interesting, just not sure how to play as buying the implied move (about 9%) seems nuts.