Lululemon (LULU) will report its fiscal Q3 results tomorrow after the close. The options market is implying about an 8% one day move on Thursday in either direction, which is a tad shy to the 9% average one-day post-earnings move over the last four quarters, its long term average of about 10%. With the stock near $230, the Dec 13th 230 straddle (the call premium + the put premium) is offered at about $18.50, if you bought that, and thus the implied move between now and Friday’s close, you would need a rally of above $248.50, or a decline below $211.50 to make money, or about 8%.
Shares of LULU are up 89% on the year, sporting a $30 billion market cap on expected EPS growth of 24% in the current year and 19% in fiscal 2021, and expected revenue growth of 18% and 15% respectively. At current estimates, the stock trades 48x 2020 eps and 7.7x sales and 40x & 6.7x F2021. This compares to Nike (NKE) which sports a $150 billion market cap, with expected EPS growth of 20% in F2020 and 16% in F2021 on 8% sales growth for both years. While NKE’s market cap is 5x that of LULU while their sales are 10x.
While LULU’s year to date gains are clearly eye-popping, the stock’s 20% gain over the last month to a new runaway all-time high is merely an exclamation point!
As my friend Carter Braxton Worth, chartist extraordinaire likes to remind me that when I am drawing lines on charts, it usually helps to make them straight, and connect as many dots as possible. In the case of LULU over the last year the stock has clearly been in a well-defined uptrend in what has been a massive range, and is now banging up against the upper band:
On Friday’s Options Action program on CNBC my co-panelists Mike Khouw and Guy Adami previewed the quarter and Mike offered a defined risk way to play for upside inline with the implied move, which was DOLLAR CHEAP in my opinion, but was taking advantage of EXPENSIVE short-dated options prices, watch below:
I like the trade if you think the stock can rally, much prefer it to risk a lot more premium with calls or call spreads.
Mike made the case of how expensive short-dated options are, and just to drive it home, the chart below shows implied volatility (in blue, the price of options) vs realized volatility (in white, how much the stock has been moving), the spread at ~40% to ~20% is wide, making long premium directional trades challenge, you may get the direction right, but will be hard to earn out the implied movement:
All that said, if I were looking to play for a move in line with the implied move to the downside I might consider a weekly put spread, risking what I am willing to lose, knowing that I need to get a lot of things right to merely break-even… direction, magnitude of the move and timing. Using weeklies trades like this become binary… get the direction wrong and the trade will be near a total loss.
Bearish Trade Idea: LULU ($229.50) Buy Dec 13th weekly 225 – 205 put spread for $6
-Buy to open 1 Dec 13th weekly 225 put fo $7.20
-Sell to open 1 Dec 13th weekly 205 put at $`1.20
Break-even on Dec 13th expiration:
Profits of up to 14 between 219 and 205 with max gain of 14 at 205 or lower.
Losses of up to 6 between 219 and 225 with max loss of 6 at 225 or higher.
Rationale: again with options premiums so high there are few near the money spreads that look too attractive. this has a max potential payout of 2.33 if the stock is down 10% by Friday’s close which the options market places at about a 14% chance.
Or for far less risk you consider flipping Mike’s call calendar around, targeting a retracement of some of the stock’s recent bounce, and also the implied move. With the stock at $229.50 the Dec – Jan 210 put calendar (selling 1 Dec 210 put at $2.80 and buying 1 Jan 210 put for $5) costs $2.20 or about 1% of the stock price. which would be the max risk of the trade. get the direction right and this trade is an easy winner, high probability of small gain, while the put spread detailed above has a high probability of a small loss on a small move.