Earnings are on tap for Lululemon Athletica Inc. (NASDAQ:LULU ). The question is, will investors sweat the report or jump and reach for Lululemon stock? Let’s size up LULU for a more-balanced stance and limited-risk options spread to fit the occasion.
Yoga-centric, fitness outfit Lululemon is set to deliver its 4th Quarter corporate confessional after Tuesday night’s close. Consensus views estimate profits of $1.27 per share. Whisper expectations are raising the bar with a slightly fitter $1.30 in earnings. Those numbers represent selling strength too.
Profits are forecasted to have grown 27%. The belief is Lululemon found a firm footing through the key holiday selling season following management’s upwardly revised sales guidance of $910 million and growth of 15.2%.
LULU Investors will also be keen on receiving any additional information on Lululemon’s search for a new CEO. The hunt follows an undisclosed breach of conduct back in February.
The news had investors sweating for about the time it takes to enjoy a hot yoga class and regaining cooler heads collectively by the end of trade.
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Will the third time prove the charm in Lululemon stock?
Looking at the monthly chart of LULU, shares are currently situated and testing the prior all-time-high initially set six years ago in May 2012. I’m optimistic a breakout to the upside is in the works.
The price action in LULU represents a third chance at finally breaking out following two failed attempts in 2013 and 2016. As well, with a series of higher highs and lows in place dating back to mid-2014, the technical takeaway is Lululemon stock does have decent support for moving higher.
While this strategist is bullish on Lululemon, to ensure LULU doesn’t trap like-minded investors with a potential and menacing quadruple top, I’d set a technical stop below $74.
That’s about 7% below the current price and a bit more than 1% beneath February’s wide doji candlestick stationed around the prior high.
Lululemon Stock Bull Call Spread Strategy
For bullish options traders, one favored alternative combination is a slightly out-of-the-money bull call spread. Verticals are excellent strategies for directionally-motivated traders with the benefits of reducing and limiting dollar and Greek risks and offering an attractive payout potential.
Another reason I prefer this type spread in Lululemon is, as touched upon above, if LULU’s bullish breakout position turns into yet another topping pattern. Bottom line, the cost for this kind of vertical won’t break the bank and prevents additional downside exposure in the event of a technical collapse.
Reviewing LULU’s options, the April $85/$90 bull call spread priced for $1.20 with shares at $80.09 looks attractive. For roughly 1.50% the risk of holding shares this trader has the opportunity to capture $3.80 in profit if Lululemon stock can break to fresh highs following earnings and continue through $90 by April expiration.
Bottom-line, this vertical is one way for bullish traders to keep the sweat to a minimum with little downside risk relative to shares and enjoying strong profits if LULU can flex some upside technical muscle.
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.