LULU: Iron condor, volatility rules

Update March 26, 2015: LULU rose sharply after earnings were announced, moving beyond the one standard deviation range but remaining within the chart range and the two standard deviation range.

Shares rose by 5.3% over the one-day lifespan of the position, or a 1,918% annual rate. The options spreads produced an -8.9% loss on debit, for a -3,244% annual rate.

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The athletic apparel designer and retailer Lululemon Athletica Inc. (LULU), headquartered in Vancouver, British Columbia, publishes earnings on Thursday, March 26, prior to the opening bell.

LULU has Weeklys among its options inventories, and I shall trade the MAR4 series of options, which trades for the last time on March 27, two days hence.

[LULU in Wikipedia]

LULU

The goal of my trade is to construct a direction-neutral position with a zone of profitability at expiration covering all of the one standard deviation range implied by volatility and options pricing, or the 30-day hourly chart support and resistance range, whichever is wider.

Ranges

Click on chart to enlarge.

LULU at 10:40 a.m. New York time, 30 days hourly bars

Implied volatility stands at 47%, at the top of the most recent rise. Volatility is 3.4 times the VIX, which measures the implied volatility of the S&P 500.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	64.69	66.88	66.18
Lower	60.31	58.12	60.55
Gain/loss	3.5%	7.0%

Implied volatility 1 and 2 standard deviations; chart support and resistance
The Trade

LULU is on the decline today but hasn't broken below support. I have structured the trade so as to put all of the one standard deviation range within the zone of maximum profit at expiration, with the position skewed a bit to the downside.

A portion of the chart chart, 28 cents at the top, stands outside the zone of profitability.

Iron condor short the $65 calls and long the $67 calls,
short the $60 puts and long the $59 puts
sold for a credit and expiring March 28
Probability of expiring out-of-the-money

MAR4	Strike	%
Upper	65	66.9
Lower	60	63.1

The risk/reward ratio stands at at bit above 1:1. The premium is 90 cents (58 cents on the calls and 32 cents on the puts).

Decision for My Account

I've opened a position on LULU as described above.

-- Tim Bovee, Portland, Oregon, March 25, 2015

References

My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

The directional score is calculated as the sum of the following:

• Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
• Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
• Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
• Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
• 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
• One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.