The shares of Lululemon Athletica inc. (LULU) have been beaten down in 2014, shedding more than 23% since the start of the year. That said, Lulu stock might be poised to end the year with a bang, as the company prepares to release key third-quarter earnings figures ahead of the open this Thursday.
For the record, Wall Street is expecting a profit of 38 cents per share from Lulu, on revenue of $426.95 million. Historically, however, the company has a track record of edging out Wall Street’s estimates, with Zacks data indicating that Lulu has bested the consensus estimate in each of the past 16 quarters.
This may explain why EarningsWhisper.com places the company’s third-quarter whisper number at 41 cents per share — 3 cents higher than the consensus.
Hit or miss, LULU stock traders could be in for a quite a ride.
Implied volatility for Lululemon’s weekly Dec. 12 options is currently pricing in a potential post-earnings move of more than 9.5%. In other words, options traders expect that Lulu stock could fall as low as $40.74 or spike as high as $49.26 immediately in the wake of Thursday’s report.
Overall, it appears that these speculative investors are anticipating a rally for LULU stock. In fact, call open interest for the December/January 2015 series of LULU options totals 170,845 contracts, compared to put open interest of 108,082 contracts. The result is a bullishly slanted put/call open interest ratio of 0.63 for the front two months of Lululemon options.
Some of this call activity on LULU stock could be the work of short sellers hedging their positions. Currently, more than 24.3 million shares are sold short, accounting for nearly 21% of the stock’s total float, or shares available for public trading.
Nervous short sellers often buy calls as a way to hedge their positions ahead of potentially volatile events, such as earnings. That said, a big enough jump from LULU stock could still force some of these shorts to limit losses by buying back their positions, which could add fuel to a post-earnings rally.
Turning to the brokerage bunch, analysts have expressed a marked lack of confidence in LULU stock. According to data from Thomson/First Call, analysts have doled out 25 “hold” or worse ratings, compared to just nine “buy” ratings. What’s more, the 12-month price target for LULU stock rests at $44.50, a discount to yesterday’s close at $44.93..
Click to Enlarge Technically speaking, LULU appears to be building a base in the $45 region after its recent rally was cut short near $50. The stock is currently perched on support at its 20-day moving average, while its 50- and 200-day trendlines appear headed for a bullish cross — a bullish technical development that could bring more buyers to the table for LULU stock.
2 Options Trades on LULU Stock
For those looking for an options trade on LULU stock ahead of earnings, there are two potential paths to pursue.
Bull Call Spreads: The first is a contrarian play, designed to take advantage of Lulu’s recent strength, the stock’s near oversold condition, and an unwinding of bearish sentiment on the shares. Traders going this route might want to consider a Jan 2015 $45/$50 bull call spread. At last check, this spread was offered at $1.49, or $149 per pair of contracts. Breakeven rests at $46.49, while a maximum profit of $3.51, or $351 per pair of contracts, is possible if LULU stock closes at or above $50 when January options expire. Traders should also note that a double on this trade can be had (at $47.98) even if LULU fails to top the $50 mark, so be sure to set your limit orders accordingly.
Selling Puts: Alternately, if LULU stock’s short-term outlook concerns you, a weekly Dec 12 $39 put sell has a high probability of finishing out of the money. At last check, this option was bid at 57 cents, or $57 per contract. As usual with a put sell, you keep the premium as long as LULU stock closes above $39 when weekly Dec. 12 options expire at the end of this week. On the downside, if LULU trades below $39 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $39 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
