lululemon athletica Earnings Trade using Options

• Posted by Greg Harmon
• on June 9th, 2011

Two weeks ago I put out a short trade idea using options on lululemon athletica (ticker: $LULU) that has paid off in spades so far and looks like it may have more room to go (link below). Without disrupting that trade here is another idea heading into tomorrow morning’s earnings report.

Below is the daily chart for LULU up to 2pm Thursday. What is prominent is the pullback from the highs appears to have found support at the February high and is now peaking over the 23.6% Fibonacci retracement at 85.90, above the 100 day Simple Moving Average at 85.00. A run into

earnings? The Relative Strength Index (RSI) looks to be turning back higher and the Moving Average Convergence Divergence (MACD) indicator is improving. But looking at the weekly chart below shows a different picture. The down trend continues and the weekly RSI and MACD are

getting worse. Divergence in the timeframes. This leads to the trade idea. With one week to go the June Options are the tool. I’m looking for the divergence above to create a bit of ebb and flow for a few days, a range per se. With this I have two trade ideas.

Sell June 85 Strike Straddles

Sell June 85/82.5 Strike Strangles

these are very similar trades with the Strangle providing a bit more downside protection, where my bias lies from the longer timeframe chart, and a bit less reward. As I write this the Straddles are trading in the mid $7 and the Strangles in the mid $6. So for the Straddle to pay off LULU needs to close between 78 and 92 next Friday. But the earnings event is sooner, and that has raised the implied volatility to over 76% compared to the historical volatility of 39% and the implied volatility for the July options in the low 50s. This tells me to expect a volatility meltdown in the June options after earnings are announced, giving an opportunity to profit sooner, provided that the price reaction to earnings is not too extreme. I am going with the Strangles

From Feeling Groovy to Kind of Blue

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