Shares of Lululemon Athletica Inc. (NASDAQ:LULU) are firming up and looking fit to jump higher. And for LULU stock bulls, an intermediate-term, bull call spread is looking good for the occasion. Let me explain.
Just over a month ago this strategist discussed Lululemon shares as an opportunity for traders to capture a bit of premium using a limited-risk, bull put credit spread. It worked quite nicely.
At the time I wasn’t ready for a full-blown rally to materialize. However, LULU stock’s corrective tumble of more than 30% appeared to be a strong overreaction from myopic investors too focused on quarterly numbers rather than the big picture.
Our point of view embraced Lululemon as a well-run company growing a great brand and one with a leg up on the competition in more than one way. Given the situation and our stance, an out-of-the-money vertical looked like a good way to profit from some anticipated price stabilization in Lululemon.
Fast forward a handful of weeks and market conditions are decidedly stronger for investors. There’s of course the market’s seasonal bullishness to consider. Secondly and in appreciating President-elect Trump’s apparent plan to give investors the gift that keeps on giving; conditions look ready for upside in LULU stock.
LULU Stock Weekly Chart
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On the heels of LULU’s near-classic correction of just over 30%, shares have gone on to move laterally for the past month. In of itself, the time and price action has established a level of technical support where one might reasonably expect investors to step in.
Secondly and on top of the textbook decline in Lululemon shares, bullish investors have the backing of the stock’s 62% Fibonacci level. That’s nice to see, as is the potential for the current price action to form a weekly chart reversal low within LULU’s existing uptrend.
LULU Stock Bull Call Spread Strategy
Reviewing Lululemon’s options board, the Jan $60/$65 bull call spread is attractive. Priced for about $1.75 with LULU stock at $58.25, shares need to climb 6% on an expiration basis in order for the position to break even. Above $65 and the position can reap its maximum benefit of $3.25 profit as the spread would eventually increase to $5 at expiration.
The vertical positioning was selected as its set modestly above an actual breakout which would occur above $59 in anticipation of follow-thru to the upside in LULU stock.
Further, a spread like this makes sense as LULU premiums are mixed to slightly expensive right now and Lululemon earnings are scheduled for mid-December.
Bottom line, spreading volatility or Vega risk under these circumstances and as the vertical allows, is a smarter approach to positioning than an alternative long call strategy in LULU stock.
The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. Mr. Tyler currently holds no positions in any of the securities discussed in his personal or managed family accounts but may initiate, for better or worse, a position in two or more business days following the publication of this article.
