Up until this past June, Ulta Beauty Inc (NASDAQ:ULTA) had been one of the few retail stocks that were immune to the Amazon.com, Inc. (NASDAQ:AMZN) effect. We all know the carnage that AMZN caused to the retail stocks, but ULTA among a few others were believed to be Amazon-proof.
Four months ago, ULTA stock started a 35% slide that was made worse on its earnings in August. It has since found its footing, but as a result, the stock is now down 12% year-to-date. This is a far cry from the peak of the four-year old 260% rally that bulls thought would never end.
I was fortunate enough to profit from the bounce after the most recent earnings dip. But now and with equity markets as resilient as they have been, I want to reload long Ulta Salon into the first quarter of 2018.
The correction did not deter the analysts on Wall Street. Their price range for ULTA stock is still well above the current price. It’s now trading below the lowest of them and almost 20% below the average price target. So, clearly, the experts agree with my bullish thesis.
However, there is a difference with HOW I express my enthusiasm. Instead of buying the stock and hoping for a rally, I bet on proven support to make me money out of thin air. The trick is that I see value in the stock just like the experts, and I would be willing to own the shares if the correction continues lower.
This means I instill a comfortable buffer zone just in case the slide is not over.
Fundamentally, ULTA is not a screaming bargain, but given its growth rates, I’m willing to give it a pass. I reserve the right to change my mind if they develop a problem turning strong comparable sales. There is this buzz on Wall Street and sometimes rumors are based on reality, so I will be on my toes.
Although I am not a client, I do visit local stores for my own simple foot-traffic check.
Bottom Line on ULTA Stock
So the thesis is simple … ULTA stock has indeed fallen from grace. But the value this created in the stock is something that I can monetize. Sell puts for income with room to spare.
The trade: Sell ULTA Mar 2018 $155 put and collected $2.25 per contract to open. This is a bullish trade where I have an 85% theoretical chance of retaining maximum profit. But if the price falls below my strike, then I own the shares and may suffer losses below $152.75.
Selling naked puts requires margin and it is not for everyone. For those who want to mitigate the risk, they can sell a spread instead.
The alternate trade: Sell ULTA Mar 2018 $160/$155 credit put spread, which if successful, would yield 10% on risk. Both trades have about the same odds of winning, but the spread carries less absolute risk.
Investing is risky, 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 as @racernic on twitter and stocktwits.
