A good old-fashioned house cleaning in Lumber Liquidators (LL) and the closest investment to a toxic asset these days managed to keep an improved floor of the technical variety in place this past week.
For bullish contrarians, with Lumber Liquidators stock and maybe the company also showing other signs of improvement; the time looks right to consider a long call strategy.
Over the past week Lumber Liquidators announced it is no longer selling those cheap and potentially toxic laminate floors. I’m referring to the same floors that made for plenty of unwanted headlines and heady declines that have helped Lumber Liquidators stock to losses of around 68% in 2015 and roughly 80% below its late 2013 highs.
Lumber Liquidators also announced it let go of its chief merchandising officer this past week and accepted the resignation of its CEO in the wake of its materials sourcing scandal.
The jury is still out on this one and shareholder-concerned, ambulance driving lawyers are still diving in. But contrarian investors might be attracted to the strides by the company to clean house and a technical floor in Lumber Liquidators stock that’s continued to hold up.
LL Stock Daily Chart
Looking at the daily view of Lumber Liquidators stock, shares of LL have managed to put in a decent technical floor with the aforementioned lows acting as support for the last few weeks of tight lateral activity.
For bullish contrarians, a new and supportive development is a tightening of Lumber Liquidators stock’s Bollinger Band, positive stochastics divergence and in Tuesday’s session, a nice little thrust on increased volume within the base.
We see the technical pattern in Lumber Liquidators stock as having bullish potential. And given short interest in excess of 40% at last count, this could help fuel a short-covering rally in the coming days.
With all this in mind and not wanting to totally dismiss the large short interest as being totally on the wrong side of the laminate fence, a quick move to $25 in Lumber Liquidators stock that would fill the gap and hit the 50-day simple moving average seems approachable as a contrarian play.
LL Stock July Bull Call Spread
Given the described circumstances, a speculative but limited risk play that might be of interest to like-minded, self-directed contrarians is the Jul $22 call for $1.25 or better.
Because of the long call’s Greeks profile and current volatility situation; we’d estimate a stop-loss below pattern lows in Lumber Liquidators stock might keep losses down to about 50% to 65% of the initial premium paid.
That’s fairly attractive, but Lumber Liquidators stock is prone to gap risk, so traders should feel comfortable with accepting the $1.25 risk at face value.
In the other hand and if shares of Lumber Liquidators stock do build gains rather than get hammered down; the opportunity to easily double the premium and even realize gains in excess of 200% if $25 were tested is definitely risk-to-reward worth considering.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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