LULU Analysis

Update 6/29/2015: I've taken my profits on LULU. Shares rose by 5.1% over 21 days, or an +87% annual rate. The position produced a +241% yield on debit.

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The athletic clothing designer and retailer Lululemon Athletica Inc. (LULU), headquartered in Vancouver, British Columbia, publishes earnings on Tuesday before the opening bell.

I shall use the JUL monthly series of options, which trades for the last time 39 days hence, on July 17.

[LULU in Wikipedia]

LULU

Ranges

Click on chart to enlarge.

LULU at 11:42 a.m. New York time, 30 days hourly bars

Implied volatility stands at 47.6%, which is 3.2 times the VIX, a measure of volatility of the S&P 500 index. LULU’s volatility stands in the 87th percentile of its most recent rise.

Ranges implied by options and the chart

Week	SD1 68.2%	SD2 95%	Chart
Upper	72.76	82.54	66.28
Lower	53.18	43.40	58.25
Gain/loss	15.54%	31.1%

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

I'm moving to strangles for the first time in an earnings play. Think of them as iron condors without insurance to limit the potential loss.

The zone of profit in the proposed trade covers a $9.25 move either way. The biggest immediate move after each of the past four earnings announcements was $7.07, and the average was $4.39.

Strangle, short the $70 calls and short the $52.50 puts sold for a credit and expiring July 18
Probability of expiring out-of-the-money

JUL	Strike	OTM
Upper	70	83.6%
Lower	52.5	83.9%

The iron condor equivalent of the position, under my guidelines, would have a long call and long put as wings on either side of the short strikes, set $2.50 out.

For the strangle, the premium is $1.50. The stock at the time of purchase was priced at $61.96.

Decision for My Account

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

-- Tim Bovee, Portland, Oregon, June 8, 2015

References

My volatility trading rules can be read here.


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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.

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Based on a work at www.timbovee.com.