Which athleisure stocks will tumble and which are poised to sprint higher? If investors are looking at Nike (NYSE:NKE) versus Lululemon (NASDAQ:LULU), maybe neither. But a combined wager on a runner-up and a name poised for another strong leg higher using an options-based pairs trade on NKE and LULU stock looks like a winning play.
Let me explain.
Athleisure Stock First Place Finisher: LULU
I’ve said it before, in a world that favors growth over size, LULU stock is having a breakout year off and on the price chart. At the tail-end of May, Lululemon crushed Street views and guided firmly above analyst views. And with strong sales growth for the foreseeable future and market cap of only $17 billion, LULU has the opportunity to continue running and become an even larger athleisure stock.
On the LULU stock chart, the price action in LULU has been very supportive of the athleisure stock’s earnings beat and growth potential. Shares jumped to fresh all-time-highs on the heels of the report. The bullish reaction from investors improved upon an already terrific 2018 for LULU stock. which began with a breakout from a massive inverse head and shoulders. LULU is now up a healthy 64%.
When I look further down the road for Lulelemon, I believe the run in this athleisure stock isn’t finished, despite the strong return. Sure, shares may look overbought on the provided monthly view, we get it. That’s also when growth runners like LULU manage to continue sprinting ahead as most investors wait on the sidelines for the “safer entry,” which rarely happens.
Bottom-line, with LULU consolidating its earnings gains in a flat-base-pattern over the past several weeks, that should be more than enough for another leg higher. In fact, I don’t mind stealing a line and saying investors should “just do it!” and get long this athleisure stock.
LULU Stock Options Strategy
Reviewing the options market for LULU stock, I’m bullish but I also don’t like to sweat downside risks in the event the price chart doesn’t cooperate. It’s also nice to be in the position to buy on weakness should the right value opportunity unveil itself.
One options strategy that fits in well with these goals is to use a modified bullish butterfly combination. With shares of this athleisure stock at $128.81, the Sep $135 / $150 / $155 call butterfly for $3.35 is favorable.
This spread contains risk to 2.5% of LULU shares if the current technical platform fails to produce meaningful upside over the next couple months. That’s nice. At the same time, this allows investors to be in a much better position financially and mentally to consider buying on weakness.
Using the September contract also provides this bullish investor with another earnings catalyst in this athleisure stock — that could be a huge win.
Lastly, if this athleisure stock does jump higher as it did in May, there’s no reason to sweat this butterfly. First, there’s a potential return of 335% at $150 if it manages to tack on another 16% at expiration. Secondly, and unlike a regular butterfly, on a larger price move above the $155 call this LULU stock investor still keeps $1.65 for a return of nearly 50%.
Athleisure Stock Runner-Up: NKE Stock
I’m not bearish on Nike. But the world’s largest athleisure stock has enjoyed a solid run in 2018 that has generated a return in excess of 22% for NKE shareholders. At the same time, growth for this mega-cap stock, while decent, isn’t tearing up the track either. It’s a bit concerning.
Sure, NKE stock bulls can point to the company’s return of sales growth in the North American market after three quarters of contraction. Others might rightfully note successful new product launches, such as the Air Max 270 or this athleisure stock’s recently announced $15 billion buyback program as reasons to cheer.
I get it.
But if I was to wager on athleisure stocks at this point, I’d have to hedge my bet on LULU with a runner-up style outlook for NKE stock. In my opinion, this is further supported by Nike’s price chart as shares have completed a measured-move breakout of around $18 from a cup-shaped base of similar depth.
NKE Stock Options Play
After looking at this athleisure stock’s options and shares at $76.59, the Aug $72.50 / $75 / $77.50 call butterfly for 50 cents looks about right for a runner-up play on NKE. This traditional long butterfly is centered slightly below the current market price and could enjoy a profit of up to $2.00 or 400% if NKE stock puts together a modest period of backing and filling over the next month.
Lastly, and with this hedged position’s exposure a scant 0.65% of NKE stock, if conditions on the price chart change dramatically for the better or deteriorate for the worse, this is a great way to suit up with another strategy without having sacrificed an arm or leg.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. 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. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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