It’s no secret the carnage that Amazon.com, Inc. (NASDAQ:AMZN) stock has inflicted on short sellers. But it’s even worse for brick-and-mortar retailers. Ulta Beauty Inc (NASDAQ:ULTA) however has thrived in this age of AMZN.
To borrow from mainstream media, ULTA has been Amazon-proof. I visited a store recently and was impressed with the long lines. I could sense the excitement that shoppers had while there. The staff was courteous, thereby adding to the whole positive vibe.
Shorting this kind of execution is futile, especially when the fundamentals back up the hype. So if I can make the assumption that equity markets in general will hold up, dips in ULTA stock are buying opportunities.
Click to Enlarge I admit this is not the most attractive technical entry point for Ulta. The stock has recently lost an ascending trend, which could carry it a bit lower. But sooner rather than later, it will find footing and that is something I can use to generate income. The trick is to find support levels that are likely to hold up in the face of this negative trend.
Stocks this popular where strong fundamentals support the story don’t die this fast — especially where ULTA hasn’t had a game-changing headline. So a 10% dip should turn out to be a buying opportunity.
ULTA Stock Trade Idea
The Bet: Sell ULTA Sep $225 naked puts and collect $1.50. Here I am 90% theoretically certain that I will be able to retain my maximum gains. But if the slide continues and price falls below my strike I will own ULTA stock and accrue losses below $223.50.
Even though I am building a 20% buffer, not all investors are willing or able to own ULTA shares, so for those I would use credit spreads instead. There, the risk is limited, so it would be a better fit for more conservative investors.
The Alternate Bet: Sell ULTA $230/$225 credit put spread where I have about the same theoretical chance of success but with defined risk. Yet if price goes my way the spread would still yield 8% in a short period of time. Compare this with needing to risk $285 per share to buy the stock here and without any room for error, then hoping that price rallies 8% just to match the performance of the spread.
Selling options is risky business, so I always risk only what I am willing 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.
