Profit From the ‘Broken’ Lululemon Athletica inc. (LULU) Stock

Advertisement

Heads up, Lululemon Athletica inc. (NASDAQ:LULU) lovers! The long-awaited resolution to its multi-month tug-of-war has finally arrived. And it appears bears are the victors. But fear not! I have a carefully crafted LULU option trade that is bound to deliver if the stock continues today’s slide.

Since vaulting higher on better-than-expected earnings mid-December, Lululemon shares have been in digestion mode. Given the one-day 15% moonshot after earnings, it shouldn’t be too surprising that LULU needed some backing and filling.

But after two months of churn, it’s high time the queen of yoga-wear makes up her mind. Chart watchers will note the symmetrical triangle that has developed for LULU. It’s a neutral pattern consisting of higher pivot lows and lower pivot highs.

LULU
Click to Enlarge
Source: OptionsAnalytix

Today’s 2% drop is breaching the lower trendline of the pattern.

And that means now is the time to strike for bears. The lower end of the triangle pattern near $63.50 is a logical first target.

If sellers press their advantage, a potential gap-fill could be in the offing. But let’s not get ahead of ourselves. Today’s suggested trade merely needs LULU to sit below $65 by March expiration.

Stretch for Profits in LULU Stock

To capitalize on additional selling, consider buying the 17 March $67.50/$65 put spread for $1.40. The put vertical spread consists of buying to open the $67.50 put while selling to open the $65 put.

By purchasing a spread instead of buying a put option outright, we reduce the cost, and therefore risk, of the trade.

The max loss is limited to the initial $1.40 and will be forfeited if Lululemon stock rises above $67.50 by expiration. The max gain is restricted to the distance between strikes minus the net debit, or $1.10, and will be captured if the stock sits below $65 at expiration.

At the time of this writing, Tyler Craig had no positions on any of the aforementioned securities.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/lululemon-stock-lulu-trade/.

©2024 InvestorPlace Media, LLC