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Traders See Short-Term Hurdles for Lululemon Athletica


Bears targeted LULU's September 65 put yesterday.

Put activity accelerated on Lululemon Athletica Inc. (NASDAQ:LULU) Thursday, as the stock fell in sympathy with the broader equities market. Roughly 14,000 puts crossed the tape, more than doubling the average daily volume. LULU's September 65 put emerged as the most active strike on the day, where 4,325 contracts changed hands for a volume-weighted average price (VWAP) of $1.54. The majority of the puts went off on the ask side, and open interest added 3,233 positions overnight, making it safe to assume that a fresh batch of bearish bets was initiated.

By purchasing the out-of-the-money puts, the traders expect LULU to fall below $65 at some point throughout the next five weeks. More specifically, they will begin to profit with each step south of $63.46 (strike price less the VWAP) Lululemon takes ahead of the close on September 20, when the soon-to-be front-month options expire. This breakeven mark sits 10.5% below the stock's current price of $70.90. The options market is giving the put a roughly 1-in-5 chance of landing in the money during the course of its lifetime, as delta is perched at negative 0.22, or 22%.

These speculators were willing to pay a pretty penny for their bearish bets, though. In recent weeks, LULU's Schaeffer's Volatility Index (SVI) has moved to 45% -- its loftiest perch since early June. What's more, implied volatility at the September 65 put is inflated relative to the stock's 20-day historical (realized) volatility (49% vs. 21.1%), meaning premium is relatively expensive.

Broadening the sentiment scope reveals a healthier-than-usual appetite for calls, not puts, in LULU's options pits. During the course of the past 10 weeks, traders have bought to open 144,708 calls, compared to 78,798 puts. The resultant 50-day call/put volume ratio of 1.84 ranks in the 95th percentile of its annual range, suggesting long calls have been initiated over puts at a near annual-high clip. However, given that more than 14% of LULU's float is sold short, and considering the stock has been struggling on the charts of late, some of this call activity could represent short sellers picking up hedges on their bearish bets.

In fact, throughout the past three months, Lululemon Athletica has not only shed roughly 11% of its value, but it has also lagged the broader S&P 500 (INDEXSP:.INX) by north of 8 percentage points. This negative price action is continuing in today's session, with the shares off 1.8% at 11:16 a.m. EDT.

This article by Karee Venema was originally published on Schaeffer's Investment Research.

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