LULU Analysis

Lululemon Athletica Inc. (LULU)

Update 12/7/2017: LULU’s earnings beat the Street by 7.7%, and the share price jumped up nearly $5 in one minute of overnight trading. Throughout the regular trading session prices fluctuated at the higher level. I exited during the regular session at 14.0% of maximum potential profit.

Shares rose by 6.5% over my holding period of less than a day, or a +2,366% annual rate. The options position produced a 16.3% return for a +5,961% annual rate.

Zacks earnings surprise predictor (ESP) pointed toward a positive earnings surprise, with a score of 0.65% in the context of a neutral (3) rank.

The trend going into the announcement wasn’t especially bullish, with a positive directional index (+DI) of 24.0 and a negative (-DI) of 18.4. In looking at the two DI metrics, I’m concerned most about the narrowness of the gap, considering wider to be more bullish. The average directional index (ADX), a measure of the strength of the trend, was 24.3 — I fudged my rules a bit, since I normally have a cut-off of 25.0.

From the pre-earnings close to the post-earnings close, the price rose by $4.35, less than the estimate, with an 85% expectation of accuracy, of $6.43 and well within the $5.00 profit zone.

The movement was also well within the metrics of the last four earnings announcements, with an average move of $8.58, a maximum of $15.54 and a central tendency of $17.31.

LULU publishes earnings on Wednesday after the closing bell.

I shall use options that trade for the last time nine days hence, on Dec. 15.

Implied volatility stands at 57%, which is 5.1 times the VIX, a measure of the volatility of the S&P 500 index.

LULU’s IV stands in the 88th percentile of its annual range and at the peak of its most recent broad movement.

The price used for analysis was $67.35.

I shall structure the position as an iron fly.

Premium: $6.34 Expire OTM
LULU-iron fly Strike Odds Delta
Long 90.00 86.8% 16
Break-even 73.34
Short 67.00 50.8% 55
Short 67.00 49.2% 45
Break-even 60.34
Long 54.00 86.2% 11

The premium is 35.2% of the width of the position’s wings.

The risk/reward ratio is 0.6:1.

The zone of profit in the proposed trade covers a $5.00 move either way. The biggest immediate move after each of the past four earnings announcements was $15.54, and the average was $8.58. After eliminating the maximum and minimum post-earnings movements, the central tendency is $7.31.

The expected move covering 85% of occurrences is $6.43 beyond the profit zone by $1.43.

The bid/ask spread is 2.9%.

Decision for My Account

I have entered a position on LULU as described above. The expected move and the post-earns moves of the past four announcements argue against the direction-neutral structure. 

On the the other, the risk/reward ratio is extremely favorable, the metrics are only slightly bullish, and the chart suggests, using Elliott wave analysis, that LULU is engaged in 5th wave topping of the uptrend that began May 31.

Given the low penalty for being wrong, I think it’s worth the risk.

The stock at the time of entry was priced at $67.51

By Tim Bovee, Portland, Oregon, Dec. 6, 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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