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Wall Street Loves Transparent Pants

Lululemon has been rewarded following its yoga-gear faux pas. Now reward yourself with this options spread.


Amid an otherwise boring trading session Thursday, a trio of retail stocks staged high volume breakouts. While both Under Armour (NYSE:UA), and Michael Kors (NYSE:KORS) surged above key intermediate-term resistance levels, the star of the day was Lululemon (NASDAQ:LULU), which briefly reached a new all-time high at $81.25.

What makes the powerful breakout in LULU all the more impressive is the fact that it came less than two months after the popular apparel company reported it would have to recall 17% of women’s yoga pants from its stores.

Contrary to what many would have thought (including yours truly), news of the overly transparent pants only served to increase investor appetite for shares of LULU. Shares are up more than 23% since the debacle.

With that kind of rousing response, perhaps LULU should produce a bunch of see-through shirts and recall those, too!

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From a charting perspective, LULU sits in a solid daily uptrend atop a rising 20-day moving average. Since bottoming in late March, the stock has been outperforming the S&P 500 Index as shown by the rising comparative relative strength line in the bottom panel of the accompanying chart.

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Further adding to the appeal is the fact that LULU is completing a weekly ascending triangle that’s been more than a year in the making.

Prior breakouts above weekly resistance have provided opportune times to enter bullish plays. This one might prove just as lucrative.

Traders looking for a conservative avenue to exploit higher prices in LULU over the coming months could purchase a September 77.50-82.50 bull call spread for $2.30. The max risk is limited to the initial $2.30 debit and will be incurred if LULU sits below $77.50 at September expiration. The max reward is limited to the distance between strikes minus the net debit, or $2.70, and will be captured if LULU is above $82.50 at expiration.

Using September options provides ample opportunity for LULU to climb above $82.50 into the max profit zone for this vertical spread.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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