Stretchy pants are back, baby! After a terrible showing in its previous earnings announcement, Lululemon Athletica inc. (NASDAQ:LULU) has been in the doghouse, languishing for months. As with all earnings-scarred stocks, spectators have allowed LULU stock to drift until a positive catalyst could be found. And that came last night.
These onlookers discovered just what they’ve been looking for — an earnings release that didn’t suck. The Street’s enthusiasm over Thursday night’s first-quarter earnings report is on full display Friday morning, as Lululemon stock is rallying by nearly 15%.
Let’s turn to the technicals to see how today’s gap is impacting the charts.
Traders seeking stable trends have long since tossed LULU stock into the “why bother” bucket. And for good reason. The stock is locked in a vicious cycle where every three months, a reset button gets hit when it gaps on earnings. By the time things settle and a trend begins to take root, another earnings release strikes and sends the stock into either the orbit or the abyss.
Friday’s launch has carried shares into no-man’s land. We’ve now returned to the heart of the price void created by last quarter’s earnings gap.
Divining the direction of stocks in a gap area is tricky due to the lack of price levels to trade off of. If buyers want to press their advantage, the stock does have plenty of room to run. The next resistance zone for LULU shares sits near $61.50.
While Lululemon might fill some of the gap in the coming weeks, I’m more inclined to bet the stock drifts higher.
It might be wise to wait for a few trading sessions to see how LULU absorbs the price jump. But if you’re itching to trade it now, here’s a bull put spread to consider.
The Trade on LULU Stock
Sell the Jul $52.50 put and buy the Jul $50 put for a net credit of 55 cents.
You will capture the max reward of 55 cents if the puts remain out-of-the-money; in other words, this put spread will deliver a 28% return if Lululemon sits above $52.50 at expiration. So in case you’re worried about missing out on the upside in LULU stock today … well, don’t. There’s always somewhere to find more profits.
The risk is capped at $1.95 and will be forfeited if the stock falls below $50.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
