$LULU – Downward Dog On Earnings?

by CC March 29, 2016 2:54 pm • Trade Ideas

Earlier Dan previewed Lululemon’s (LULU) earnings due before the bell tomorrow. As we often do with events that we’re not involved in ourselves we still want to detail some options opportunities for those that are already involved or looking to get involved with defined risk.

First, let’s look at the implied move of about 9%. The April 1st weekly 61 straddle is about 5.30. That puts the expected move at about 66.50 to the upside and 56 to the downside. But as Dan pointed out, the last 2 earnings moves have both seen declines of 13 and 16%. So that can help inform our strikes to target on each side:

Bullish/ Stock Alternative

LULU (61.20) Buy the April 60/67/74 call fly for 1.90
  • Buy 1 April 60 call for 3.75
  • Sell 2 April 67 calls at 1.00 (2.00 total)
  • Buy 1 April 74 call for .15

Rationale – This defines risk in case of a decline to just 1.90 or about 3% of the underlying, which seems disciplined considering the large recent declines in the stock on earnings. It targets just above the implied move to the upside and just above recent highs (but below the 2015 highs closer to 70). The breakeven is just .70 above where the stock is trading so there’s not a ton of extrinsic premium risk. There is risk if there’s a massive move higher as profits begin to trail off above 67 and the trade actually becomes a loser above 72.10, so this is not for those playing for a home run squeeze higher.

Hedge vs long stock / Bearish

LULU (61.20) Buy the April1st 59/52 put spread for 1.45
  • Buy 1 April1st 59 put for 1.65
  • Sell 1 April1st 54 put at .20

Rationale – This put spread risks just over 2% of the underlying and specifically targets the event as the options expire this Friday. It gives a more room that the expected move (expected move puts the stock at 55, this targets 52, down 14%) based on recent history. The risk is obvious, on a move higher or nowhere this becomes worthless. But it breaks-even on the downside at 57.55 and has a maximum gain of 5.55 if the stock is $52 or lower. Below 52 and profits (and protection against a long) maxes out.