Wednesday, September 9, 2015

LULU Analysis

Update 10/6/2015: I completed my exit of LULU, ending the position entirely nine days before expiration.

Shares declined by 19.2% over 17 days, or a -412% annual rate. The options produced a 47.4% loss on debit, for a -1,017% annual rate.

Update 9/16/2015: I've exited the puts in my LULU iron condor, transforming it into a bear call spread. The price tumbled below the profit zone immediately after earnings were published and continued to drift downward thereafter.

Under normal circumstances, with 30 days remaining until expiration I would have held on for a week or so longer to see if there was a rebound. However, the Sept. 17 Federal Open Market Committee announcement in my judgement has a large potential for sending the market downward, so I am eliminating further downside risk.

I shall calculate profit and loss for the entire position after it expires on Oct. 17.

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

[LULU in Wikipedia]


I shall use the OCT series of options, which trades for the last time 37 days hence, on Oct 16.


Click on chart to enlarge.
LULU at 10:22 a.m. New York time, 30 days hourly bars
Implied volatility stands at 55.2%, which is 2.3 times the VIX, a measure of volatility of the S&P 500 index. LULU’s volatility stands in the 82nd percentile of its annual range.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%ChartEarns
Implied volatility 1 and 2 standard deviations; chart support and resistance, maximum earns move

The Trade

In drafting the proposed trade, I paid greatest attention to covering the historical maximum range of earnings response.

Iron condor, short the $72.50 calls and long the $75 calls,
short the $57.50 puts and long the $55 puts,
sold for a credit and expiring Oct. 17.
Probability of expiring out-of-the-money


The premium is $0.90, which is 36% of the width of the position’s wings.The stock at the time of purchase was priced at $65.01.

The risk/reward ratio is 1.8:1.

The zone of profit in the proposed trade covers a $7.50 move either way. The biggest immediate move after each of the past four earnings announcements was $6.75, and the average was $4.84.

Decision for My Account

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

-- Tim Bovee, Portland, Oregon, Sept. 9, 2015


My volatility trading rules can be read here.


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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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