One stock that traders can’t ignore lately is Lululemon Athletica Inc. (NASDAQ: LULU). This sports apparel maker has been knocking it out of the park. LULU stock is up 35% for June and it doesn’t show any signs of stopping its upward momentum.
Vancouver, Canada-based LULU operates 142 stores in the U.S., Canada and Australia where it sells sports apparel and equipment along with yoga-related materials.
With LULU up around $120 a share, buying the stock outright is about the worst way to play this opportunity. It’s too much risk, too much capital tied up and too little a percentage potential profit. Clearly this is a case where buying calls is a far superior trade.
I like buying the LULU August 130 Calls at 3.30 or better. They offer low risk in terms of capital outlay (only $330 for one contract as opposed to $12,000 for 100 shares). And they offer a highly-leveraged potential profit should LULU continue higher. If this stock should rise, say, $10, traders will nearly double their investment in the calls as opposed to a less-than 10% profit on the stock.
The only real additional risk that the calls have that the stock doesn’t is that if LULU just sits here and does not rise, the time factor erodes the price of the option. But, with a stock like LULU, low-volatility is not a major concern.
Dan Passarelli of MarketTaker.com writes the Market Taker Edge options newsletter. Dan has more than 17 years’ experience in the options industry as a market maker, Options Institute instructor and author of “Trading Option Greeks.”