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Lululemon Athletica inc. (LULU) Bear Makes a Gutsy Pre-Earnings Bet

Lululemon Athletica inc. will report earnings ahead of the June 12 open

by 5/30/2014 10:12 AM
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Option Brief: Put players piled into Lululemon Athletica inc.'s (NASDAQ:LULU) options pits yesterday, with the contracts trading at nearly seven times the daily average, and outpacing calls by a more than 5-to-1 margin. Short-term options were in high demand, as evidenced by the equity's 30-day at-the-money implied volatility (IV), which jumped 5.5% on the session to finish at 46.6% -- its loftiest close since late March.

Diving deeper reveals that the majority of the day's put action centered on two strikes, as one speculator initiated a long put spread, perhaps betting on a poor reaction to the athletic apparel company's impending earnings report. Specifically, a block of 9,974 weekly 6/13 44-strike puts was bought for $1.75 apiece, while a symmetrical block of weekly 6/13 39-strike puts was simultaneously sold for $0.30, resulting in a net debit of $1.45 per pair of contracts. Open interest soared at both strikes, confirming the addition of new positions.

Ideally, LULU will finish right at $39 at next Friday's close, allowing the speculator to pocket the maximum potential profit of $3.55 per pair of contracts (difference between the two strikes less the net debit). However, she will still be able to make a profit if LULU expires south of the breakeven mark of $42.55 (bought strike less the net debit). Regardless of how low the stock may fall, gains are capped at $3.55. Risk, meanwhile, is limited to the initial cash outlay, or roughly $1.45 million (9,974 contracts * $1.45 net debit * 100 shares per contract), should LULU settle north of $44 at next Friday's close.

In today's session, the stock is extending its lead north of the $44 area -- up 0.9% at $44.84. As noted, though, the company is slated to step into the earnings confessional ahead of the June 12 open. Looking back over the past four quarters reveals some wild single-session price swings in the wake of LULU's quarterly results, including a 17.5% drop following its year-ago report, and a 6.2% pop last quarter. For Lululemon Athletica inc.'s (NASDAQ:LULU) first quarter, analysts are calling for a per-share profit of 32 cents, in line with what the company reported in June 2013. Ahead of its earnings report, LULU will host its annual shareholder meeting on Wednesday, June 11 -- which could also serve as a catalyst for the stock.

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