Shares of Lululemon Athletica inc. (LULU) have jumped, stretched lower and are now hitting a potential technical floor. For bullish investors, a LULU bull put spread offers a limber and less sweaty way to position. Let me explain.
A couple weeks back, yoga-centric outfit Lululemon handily topped its previously trimmed guidance.
Earnings, comparable stores, sales and gross margins all came in better than expected. The report, according to Paul Lejuez of Citigroup, “discredited the bear thesis” in LULU stock.
Similarly, “Mad Money” host Jim Cramer gave his view that Lululemon shares are not finished going higher. Cramer noted LULU’s terrific fourth quarter and strong digital sales presence as supports for LULU stock.
Other investors did take notice following the company’s earnings release. Likely aided by a few short bears getting an unwanted workout, LULU managed to gap and rally 10% higher in the report’s aftermath.
LULU Stock Weekly Chart
Click to Enlarge
First, LULU hasn’t moved in the last three to four years. The simple observation is based on the lateral line I’ve placed on the LULU chart. The stock hit this price level on numerous occasions since late 2011, and it’s essentially where shares of Lululemon are currently trading.
Second, our first observation is only partly true. LULU has actually demonstrated plenty of volatile price swings during this long period. These price swings have also completed two separate corrective head-and-shoulder moves and established a higher low in the process. That’s bullish.
Furthermore, the daily chart (not shown) is potentially supportive, with current price action resulting in a bullish gap fill and loose testing of the 50-day simple moving average.
All told, traders have the opportunity to buy the bullish LULU weekly chart on (expected) short-lived daily weakness.
Your Lululemon Options Trade
After reviewing the options board, one vertical which fits the situation in Lululemon is the Weekly April 29 $62.50/$60 bull put spread for a credit of $1.25 or better.
Priced a nickel above the current spread mid-market, this vertical only requires a move up of 2% at expiration to collect the full credit for a return of 100% in less than three weeks.
The spread breakeven of $61.25 essentially matches LULU’s current price of $61.22. Thus, as a pullback style entry, the vertical position fits nicely.
Without assuming too much risk on technical assumptions, which could always go awry, the max loss is contained to $1.25 below $60 in Lululemon’s stock price.
Bottom line, that’s a nice insurance policy to have in case LULU gets stuck in a prolonged “downward dog.”
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
