It’s no secret that Amazon.com, Inc. (NASDAQ:AMZN) changed the way we shop. As a result, the stock of public companies who relied mostly on brick-and-mortar sales are in disarray, to say the least. However, there are bystanders caught in the crossfire.
Lululemon Athletica Inc. (NASDAQ:LULU) is one of those businesses that doesn’t deserve the retail hate. LULU stock, more often than not, suffers more in the wake of retail investing themes than from its own issues. The effect of the see-through pants are long gone.
LULU stock is somewhat expensive from a price-earnings basis. But it’s not outrageously bloated. I view it similarly to the way I look at Nike Inc (NYSE:NKE). Both are global brands with loyal clientele that doesn’t mind overpaying. This is something I can leverage to create income from selling risk.
The LULU valuation is now much better since it’s had a terrible time trading. In the last 12 months the stock is down 25%. As long as management continues to make decent decisions the value proposition will continue to improve, thereby inviting bidders on its stock.T herein lies my opportunity to profit.
Today, I am betting that LULU stock will have decent support through 2017. Notice that I am not hoping it rallies. I have much less faith in the upside potential than in the proven support levels.
Click to Enlarge If not for Lululemon options, I would need perfect market timing to profit from the next leg higher. But since I use options, I can be slightly imperfect with that and still bank maximum profits. All I need is for price to stay above my strikes.
Technically, LULU stock is in the middle of its five-year range. I am a strong believer that markets overshoot on the way up and down. So somewhere in the middle lies the truth, and here we are with LULU stock.
The Bet: Sell LULU Oct $47.50 naked put and collect 60 cents to open. The 20% buffer from current price gives me a 90% theoretical odds of success. But if price falls below $46.9 then I would accrue losses.
Some traders prefer to limit the exposure so for those they can use credit spreads instead of selling naked puts.
The Alternate Bet: Sell Oct LULU $47.50/$45 credit put spread where the odds of winnings are the same but with much smaller risk. If successful, the spread also delivers 6% in yield.
When investing in the stock market there are no guarantees. So I never bet more than I can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.