Shares of Lululemon Athletica Inc. (NASDAQ:LULU) have been on a post earnings moonshot. LULU stock is now up an astronomical 26% since reporting earnings on March 27. While the earnings report was good, it wasn’t that good. LULU has now gone way too far, way too fast and is due for a pullback over the coming weeks.
Lululemon reported earnings of $1.33 per share, beating analysts estimates of $1.27 per share. Revenues also topped expectations marginally, coming in at $929 million versus $912 consensus. A move higher in LULU stock was certainly warranted, but such a massive move higher based on a 5% beat in EPS is getting extreme. The P/E ratio for LULU now stands at a rather robust 52.2, the highest level since 2009. It also is trading at nearly 2.5 times the multiple of the S&P 500. At some point valuation will begin to matter again.
Once LULU stock broke out past the major resistance at $83, the breakout/momentum players took over. Lululemon stock has now closed higher for 11 consecutive days, so at some point a pullback is due just because no stock goes up every day. 14 day RSI is decidedly overbought with a reading over 80. Probability alone suggest a counter-trend pullback is in the offing.
Most importantly, yesterday’s price action showed a reversal pattern. LULU stock traded up past the magical $100 threshold before giving in to selling pressure and ultimately closing nearer the lows of the day at $99.80. This shooting start candlestick pattern is a reliable indicator that the buyers may finally be exhausted after the unrelenting rally, with a potential sharp reversal on the horizon now that the momentum has broken.
LULU options are trading at the 37th percentile of implied volatility (IV) which means option prices are somewhat cheap. This favors being long volatility when constructing trades. So to position for a pullback in LULU stock, a put diagonal trade makes intuitive sense.
LULU Stock Trade Idea
Buy LULU June $100 puts and sell LULU May $96 puts for a $4.50 net debit.
Maximum risk on the trade is debit paid of $450. The spread is net short 22 deltas at inception, which is equivalent to being short 22 shares of stock. Ideally LULU closes near $96 at May expiration to realize the maximum potential gain.
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