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Bullish Traders Eye Lululemon Athletica inc. (LULU) Ahead of Earnings

Pre-earnings call volume spikes on LULU

by 3/18/2013 1:49 PM
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Bullish bettors have been zeroing in on Lululemon Athletica inc. (NASDAQ:LULU - 66.29) today, which is on tap to report fourth-quarter earnings later this week. More than 7,900 calls have crossed the tape so far, which is almost triple the stock's anticipated intraday call volume. A large portion of today's trading seems to be focused on the newly minted front-month series of options, with speculators hoping for LULU to climb higher over the course of the next few weeks.

Digging deeper into the data, it appears the April 67.50 and 65 calls are receiving notable attention, with 1,345 and 1,049 contracts exchanged, respectively. The majority of these calls traded at the ask price, signaling they were purchased. The 67.50 calls changed hands at a volume-weighted average price (VWAP) of $3.33. Meanwhile, implied volatility was last seen 2 percentage points higher, hinting at buy-to-open activity. If these calls were, in fact, bought to open, speculators are betting on Lululemon to rise north of $70.83 (strike price plus the VWAP) by the close on April 19, when front-month options expire. This denotes expected upside of about 6.8% to the stock's current price.

Meanwhile, the 65 calls traded at a VWAP of $4.58. Since today's volume outstrips present open interest levels -- and implied volatility has ticked 1.6 percentage points higher during the course of the session -- it can be assumed that these calls also represent the initiation of fresh bullish bets. In this scenario, traders will secure a profit if the equity ascends the $69.58 mark by April expiration. The delta for these options sits a 0.58 -- a decrease from Friday's closing delta of 0.67 -- giving them a 58% chance of finishing in the money.

Today's campaign for calls is a deviation from Lululemon's recent trend. The equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio checks in at 1.43, confirming traders have bought to open 143 puts for every 100 calls during the past 10 weeks. This ratio ranks higher than 94% of similar annual readings, conveying speculators have snatched up puts over their bullish counterparts at a faster clip just 6% of the time during the last 12 months.

The yoga apparel guru is off to a shaky start in 2013, having shed around 13% year-to-date, and lagging the broader S&P 500 Index (SPX) by almost 18 percentage points during the past 60 sessions. What's more, the shares remain pinned beneath their 20-week moving average, which has acted as resistance since early January.

As previously noted, Lululemon Athletica inc. is scheduled to reveal quarterly earnings ahead of the opening bell this Thursday, and has bested consensus bottom-line estimates in each of the past four quarters. Should the company report another round of upbeat results, today's bulls could end up reaping the benefits of a post-earning surge.


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