What’s the Implied $LULU ?

by CC March 30, 2016 10:21 am • Commentary• Trade Ideas

Yesterday, we previewed LULU earnings and offered a couple of trades. We focused on the implied move  and how it compared to recent moves (particularly on the downside). That implied move and recent history informed choice of strikes and positioning and is a good lesson in how to look at these events. Here’s what we had to say yesterday:

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%.

What we did was select a stock alternative targeting the implied move to the upside and a put spread that protected against even more than the implied move on the downside. The thought process is that the implied move is symmetrical average in each direction, but the risk is usually asymmetrical. This is something that friend of the site and Dan’s co-panelist on Options Action, Mike Khouw has done work on and he detailed some of those thoughts in a webinar with Dan and myself on the Ticker District last week. If you missed it, check it out here.

As for the event itself, the stock is up, you guessed it, almost exactly with the implied move, trading about 67, slightly more that +9%. The bearish/hedge trade is worthless and that was the risk one needed to consider, was 1.45 worth the potential gains the upside against long stock (probably, lost 1.45 vs $6 gains in the stock and kept the long through a risky event) or was it worth the potential gains if it was a straight bearish trade? (probably not, event trading like that is basically gambling).

As for the bullish/ Stock alt? here was the trade:

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

The stock is exactly where this trade targeted and now it’s simply a matter of waiting to see what’s next. If the stock looks like it will settle in here nothing needs to be done. The longer you hold this trade into April expiration the better it gets. If the stock looks like it will fail here or take off like a rocket to the upside then it may need to be managed. Right now the options are too wide to even bother trading but as they settle in and tighten this will likely be worth about $4 mark to market vs $67 stock. Intrinsically they’re worth $7 there. So that difference of $3 is the extrinsic premium yet to come in on the short options on the $67 line. So that helps with trade management in that there’s about a $3 buffer on each side that you can use as a stop if the stock starts to move higher or lower from this strike. As long as it stays within that range you can be patient. If it starts to violate that range then it can be closed for the current profits.