Limbering Up with Lululemon Options

by Joseph Hargett | September 6, 2012 9:39 am

Yoga-inspired athletic apparel specialist Lululemon Athletica (NASDAQ:LULU[1]) will end the week with a bang as the company rolls onto the earnings stage this Friday morning ahead of the market open. Wall Street is expecting second-quarter earnings to rise 19% over the year-ago period to 31 cents per share, with revenue seen advancing 33% to $282.34 million.

Checking in with LULU’s sentiment backdrop, expectations are a bit muted — which is to be expected given the stock’s plunge following Lululemon’s poorly received first-quarter earnings report [2]in June. Specifically, the whisper number arrives two cents higher at 33 cents per share, according to Meanwhile, only 11 of the 23 analysts following the shares rate them a buy or better.

Technically, LULU shares have been considerably strong in recent weeks, surging 25% off their Aug. 1 low near $52. In fact, the stock has reclaimed all of its major moving averages, including drawing its 10-day and 50-day trendlines into a bullish cross.

That said, LULU must still fill in the gap created in the wake of its first-quarter earnings report. To do so, the shares will need to best the round-number $70 level.

Looking at weekly September options data, implieds suggest the potential for LULU to do just that, pricing in a post-earnings move of more than 10% ahead of expiration. Still, trading weekly LULU options here could be a recipe for an ulcer for those without the stomach for extremely short-term options trading.

For those options traders looking to save their gut and still take advantage of a breakout run for LULU shares, a (monthly) September 65/75 bull call spread might fit the bill. This trade was last offered at $3.92, or $392 per pair of contracts, placing breakeven at $68.92 – a gain of about 3.3% from yesterday’s close. A maximum profit of $6.08, or $608 per pair of contracts, is possible if LULU closes at or above 75 when September options expire.

As of this writing, Joseph Hargett had no position in any securities mentioned here.

  1. LULU:
  2. Lululemon’s poorly received first-quarter earnings report :

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