In the age of a struggling retail sector, Ulta Beauty Inc (NASDAQ:ULTA) is one of few success stories. Amazon.com Inc (NASDAQ:AMZN) inflicted vicious damage to the brick-and-mortar retailers. But while shares of Macy’s Inc (NYSE:M) are down over 25% in the past year, ULTA stock is up almost 43%.
The ULTA stock chart’s ramp rivals that of tech superstars. The irony is that most experts would relatively rate the stock as expensive. To that I say, give me expensive anytime when growth and margins are as impressive as those of Ulta Salon’s.
Management has proven itself a premier operator — just visit a store and you’ll also believe. The challenge for traders is finding the proper entry point.
Click to Enlarge Technically I worry about rising trends of this steepness, but ULTA’s performance continues to baffle the shorts much like Nvidia Corporation (NASDAQ:NVDA) does in the tech sector. So until that changes, any trades into it would have to be on the long side. My last win came easy generating profits out of thin air. Using options makes it possible to take a position and build room for error.
Today, I want to generate income by selling downside risk into the ULTA earnings. The trick is to find proven levels of support where buyers would step in if the stock falters on earnings.
The short term reaction to the report is arbitrary but the underlying theme should resume shortly thereafter. Even so, my strategy does not require Ulta Salon to rally as I can profit as long as the price stays above my risk exposure.
ULTA Stock Trade Idea
The Bet: Sell the ULTA Dec $220 put and collect $2.75 per contract to open. There I have a 90% chance of maximum gains but if price falls below $217.25 I accrue losses.
If I am unwilling or able to own the Ulta Salon stock, then I should use a bull put spread instead. There, the risk is limited to the width of the spread yet it can still deliver 10% in yield. The alternative would be to pay $298 per share and, without any buffer, then need it to rally 10% just to match the spread.
Selling options is risky business so I only risk what I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
