Tuesday, December 8, 2015

LULU Analysis

Update 12/17/2015: LULU reached 50% of its maximum profit and I exited.

Shares declined by 3.3% over nine days, or a -133% annual rate. The options position produced a 100.0% yield on debit -- it doubled -- for a +4,056% annual rate.

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 JAN series of options, which trades for the last time 38 days hence, on Jan. 16.


Implied volatility stands at 66%, which is 3.8 times the VIX, a measure of volatility of the S&P 500 index. LULU’s volatility stands in the 89th percentile of its annual range.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; maximum earns move

The Trade

LULU was in a downtrend from March 31, hitting a lowest low on Nov. 16 and then rebounding a little in a counter-trend correction to the upside. I judge LULU's trend to be bearish, despite the upward bounce.

Zacks Investment Research gives LULU a somewhat bearish rank of 4, with no expectation of an earnings surprise.

Twenty-five analysts tracking LULU come down collectively with a 15% enthusiasm index, and 56% of them give a Strong Buy recommendation.

The stock price has risen the first trading day after three of the last four earnings announcements.

Given the mix of bull and bear among the indicators, I shall attempt a direction neutral play, in the form of an iron condor.

Iron condor, short the $60 calls and long the $62.5 calls,
short the $42.50 puts and long the $40 puts,
sold for a credit and expiring Jan. 17.
Probability of expiring out-of-the-money


The premium is $0.82, which is 33% of the width of the position’s wings. The stock at the time of entry was priced at $51.72.

The risk/reward ratio is 2:1.

The zone of profit in the proposed trade covers a $8.75 move either way. The biggest immediate move after each of the past four earnings announcements was $10.51, and the average was $6.13.

However, the most recent earnings announcement produced an unusually large price movement. If the outlier is eliminated, the biggest immediate move was $6.75 and the average, $4.67, well within to the range covered by the proposed trade.

Decision for My Account

In order to get a fill on LULU I've had to restructure the trade by narrowing the interval between the short strikes. I've changed the figures above to conform.

The restructuring narrows the spread between the short strikes to $17.50 from $22.50, reducing the probability of expiring out of the money from around the 85% level to around the 80% level.

The restructured position was filled immediately.

-- Tim Bovee, Portland, Oregon, Dec. 8, 2015


Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner 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


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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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Based on a work at www.timbovee.com.

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