LULU Analysis

Lululemon Athletica Inc. (LULU)

Update 9/1/2017: LULU’s earnings bettered the consensus estimate of  $0.37 per share by two cents, coming in at $0.39 per share. I exited for a profit at 25.1% of maximum potential profit.

Shares rose by 6.5% over my one-day holding period, or a +2,370% annual rate. The options position produced a +33.5% return for a +12,224% annual rate.

The price was $61.22, up $3.65, at the opening bell after earnings were published. That is greater than the expected move of $5.23 but within the $7.23 beak-even width. I exited at $61.16 for a $4.21 debit. Analyst data had suggested a chance of a small earnings surprise, and so it proved to be.

The movement was a ratio of 0.4 of the average and central tendency movements of the last four earnings announcements, and 0.2 of the maximum. This is consistent with LULU’s low beta of 0.25.

LULU publishes earnings on Thursday after the closing bell.

I shall use options that trade for the last time eight days hence, on Sept. 8.

Implied volatility stands at 58%, which is 5.4 times the VIX, a measure of the volatility of the S&P 500 index.

LULU’s IV stands in the 97th percentile of its annual range and at the peak of its most recent broad movement.

The price used for analysis was $57.34.

Premium: $5.62 Expire OTM  
LULU-iron fly Strike Odds Delta
Long 69.50 69.5% 18
Break-even 63.12 ~77.0% ~27
Short 57.50 52.9% 53
Short 57.50 47.0% 47
Break-even 51.62 ~75.0% ~20
Long 46.00 90.0% 7

The premium is 77% of the width of the position’s wings.

The risk/reward ratio is 1.1:1.

The zone of profit in the proposed trade covers a $7.25 move either way. The biggest immediate move after each of the past four earnings announcements was $15.54 and the average was $9.57. After eliminating the maximum and minimum post-earnings movements, the central tendency is $8.55.

The expected move covering 85% of occurrences is $5.23, within the $7.23 break-even width.

The bid/ask spread is 8.5%.

Decision for My Account

On the positive side the position has good coverage. However, it is also true that we are in an era of large post-earnings movements, a fact that has hurt my profits over the last few weeks.

My caution dutifully enhanced, I also checked a couple of more indicators, and as it turns out, they suggest I should go ahead. The Zacks Investment Research earnings surprise predictor is 0.23, suggesting only a small earnings surprise, and the beta is only 0.25, suggesting that LULU is way more likely than the S&P 500 to have a limited move.

On the negative side, the options grid forced me to skew just a bit, but no problem.

Taking all of that into account, I have entered an order on LULU as described above. The stock at the time of entry was priced at $57.28.

By Tim Bovee, Portland, Oregon, Aug. 31, 2017


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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