It’s great to be back with you in the new year! Toward the end of 2011, the market was as volatile as I can ever remember. I’ve been patient on entering new positions, waiting for a stock to present itself to me, all gift-wrapped and ready.
And when it comes to Lululemon Athletica (NASDAQ:LULU), you can call this trade a late-arriving Christmas present! Here’s why…
The other day, LULU was up big on my favorite item of news.
How big? The stock was up 13% on the day with almost 14 million shares traded (compared to an average daily volume of 2.7 million shares).
You would have thought LULU announced a crushing earnings announcement, surprising everyone to the upside, but it didn’t.
(Again, the reason for the big day was my favorite reason for getting involved with a stock … more on this later!)
One-day, out-of-the-blue action like what just happened on LULU is compelling. I call it a train wreck. A train wreck in the sense that if you were driving down the highway and looked off to the side and saw smoke, fire, twisted steel and fresh dirt mounds because of the scattered train cars — you wouldn’t be able to help yourself … you’d HAVE TO LOOK AT IT!
That’s the same with LULU — you have to look at it.
Taking a glance at LULU over the past several months, it’s been quiet and on the back burner, trapped in a range, “building a base” as the technicians say.
And while this huge one-day action didn’t bust the stock out of it’s trap, it’s definitely attention-getting. Mostly for the reason that LULU is now very close to its 52-week high. While 52-week highs are not all created equal, LULU is getting very near making one of my favorite 52-week highs.
The other nice thing we’ve got here is the overall market cycle. If you’ve tuned into my other articles, I’ve mentioned this before. Just like the planets cycle through their orbits, the human herd gets in and out of the stock market in general, which creates cycles. Up cycles and down cycles. Those institutional humans especially drive these stock market cycles!
As the cycle goes right now — the market has picked itself off the mat and is presently in an up cycle … taking 3 out of 4 stock with it (which studies have pointed out for decades … approximately 75% of stocks flow the way of the market cycle).
So we’ve got an individual stock with reasons to get involved, plus we have the wind at our backs because of the favorable stock market cycle.
So what’s the trade?
Well considering we still have a very volatile market on our hands, there are some awesome things we can do! Especially considering that LULU has weekly options available to trade on it.
So let me be clear. My premise for this trade is this:
1) LULU trades higher in the intermediate term (over the next 1-2 months).
2) The market’s still a volatile place out there.
3) LULU options will likely be more pricey and volatile, especially between now and March (sometime in mid March is when LULU will announce earnings).
4) Even if LULU has some sideways weeks, I still want to be able to make money.
5) I have a limited, fixed downside. Which means I can sleep comfortably at night, each night of this trade.
6) The trade has reasonable margin requirements.
So here are the trades I did on LULU on Jan. 10:
I call it a “Money Press” trade. The technical term for a money press is doing a put credit weekly calendar spread. Whoosh, that’s a lot of words, but here’s what it looks like:
(It’s designed to put weekly income in our pockets, FYI.)
For the full details on this trade, go to Page 2.
With LULU trading near $60 per share, the trade has two steps:
- Selling 10 LULU Jan 62.50 Puts
- Buying 10 LULU Feb 55 Puts
At current prices, that means collecting $2.80 a share ($280 a contract) on those sold Jan 62.50 Puts, and spending $1.60 ($160) on those Feb 55s at the same time. All told, that means netting $120 a contract on the whole trade.
Just a quick note: With the stock trading a little north of $60, this is a tad aggressive to be a seller of the $62.50 in-the-money puts. (Puts that are in-the-money have a strike price above the market price of the shares.) But with the market cycle, the reaction to LULU’s stock price, and given LULU had already marked a high of $62.25 the day I traded it, I went with them.)
There’s one more step to this LULU trade for now.
Next, and separately, I bought 5 LULU March $57.50 Calls. These are in-the-money calls – which means the strike price is lower than the stock price. In this part of the trade, I’m buying half as many calls as the size of my LULU “Money Press.” I picked March expiration because these options will be alive all the way up to LULU’s next earnings announcement date.
Buying the calls in-the-money like this helps pare back what I spend for time value. It will also cover what could be some of the most exciting months this stock will see all year.
This goes back to the reason why LULU jumped out of the gate so much on a single trading day. Analyst upgrades are likely, and rumors of new store openings, new products, etc will likely flow between now and March.
But back to the Money Press:
What I plan to do is sell weekly, at-the-money put premiums on LULU between now and February options expiration, then re-evaluate. What I anticipate is that the collected premiums will entirely pay for my March call options (which are trading for around $6.50 apiece), with a lot left over to boot!
Further, I expect the value of the March call options to rise up between now and when they expire (which is the third Friday of March).
A side note is the market will be closed on Monday for Martin Luther King Day. (This means there will be a long, three-day weekend where stocks don’t trade. This works wonders when you profit on a position because of time decay issues, especially when these options are weekly options!)
Whoa … that’s a lot of actions … but it’s my first new trade of the new year.
If you want to super-charge your trading and your confidence, you have to have an effective approach that works because of human nature.
One of the most effective things I do is trade when a certain, little-known piece of news is announced. It was something I learned about during the stock market wipeout of 2001.
That was the year of the “dot-bomb” Internet stock collapse AND 9/11. There was study done that year, one of the worst stock market years on record, and 86% of the time a company announced this certain, little-known piece of news — its stock went up over the next 3 to 6 months.
And it’s working still today like a charm. And will work as long as there are human beings behind all those stock trades.
(The news is NOT an earnings announcement.)
For a limited time, I’ll tell you exactly what this little-known piece of news is, and tell how you can start to use it in your trading. Best of all, there’s no credit card required or seminar to attend in some nearby hotel.
Yours for bigger profits,
P.S. There’s a lot of talk these days about commodities. Like if gold can sustain its uptrend, if copper’s on the comeback, whether corn demand has been fully priced in…
And about currencies, like if the dollar will ever make a comeback, what does our bloated debt mean for the dollar, what will happen to the Euro, etc, etc, etc.
In times like these, I say the best commodity to stay focused on is the commodity between both your ears. With all of today’s news, noise and views, knowing what to do and where to look is more valuable than 24K gold.
For a limited time, I’ve put together a killer website with some simple and effective things you can do to prosper in today’s crazy, shifty market. I’ve chosen this column and forum to open up these things to you for free.
I hope to see you there!