As the bull beat moves on, low-risk opportunities continue to come across my desk. The latest beauty is Lululemon Athletica inc. (NASDAQ:LULU).
Price and volatility have joined forces to create a compelling setup in the Vancouver-based athletic apparel company. Price contribution has been quite obvious. A buying bonanza has lifted shares of LULU stock into a steep uptrend over the past four months. The ascension has been quick, with few attractive buying opportunities along the way — until now.
LULU stock has finally paused long enough for a base to form, providing a low-risk entry on a breakout over $67.75.
For a look at volatility, we turn to the Bollinger Bands indicator.
Bollinger Bands are an adaptive volatility envelope signaling when volatility has compressed in a stock, among other things. The recent consolidation in LULU stock has driven the bands tighter and tighter together. In fact, the distance between the upper and lower band has fallen to $4.17 which is the lowest Bollinger Band width in a year (not shown).
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Remember, volatility is cyclical. Low-volatility periods inevitably give way to times of higher volatility. The narrowing of the bands suggests a breakout could be imminent.
And if the existing trend is any indication, I suspect the squeeze will come to the upside.
Reach for LULU Stock With Call Spreads
With LULU options neither expensive nor cheap, a simple call vertical spread should get the job done. By both buying and selling call options surrounding the current stock price, our exposure to time decay and volatility will be muted.
Buy the April $65/$70 call vertical spread for $2.45. The max risk is limited to the initial $2.45 cost and will be lost if LULU sits below $65 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $2.55, and will be captured if LULU can rise above $70. With LULU sitting at $67, we only need to see another $3 rise to achieve our max profit at expiration.
The fact that we can double our money if LULU rises a mere 4.5% illustrates perfectly the leverage afforded by the options market.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
