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Option Brief: Lululemon Athletica inc. (NASDAQ:LULU) has seen its share of struggles in recent months, both fundamentally speaking and on the charts. But in Monday's trading, some traders bet on short-term support for the retailer's shares by selling to open front-month puts.
Roughly 22,000 puts changed hands in LULU's options pits yesterday, more than tripling the average daily volume. The most active put was the March 47.50 strike, where 90% of the 5,836 contracts that changed hands did so at the bid price, suggesting they were sold. Open interest rose by nearly 5,000 contracts overnight, indicating the puts were sold to open on the hopes that LULU will continue to trade north of $47.50 through March options expiration in two-plus weeks.
If LULU -- currently perched at $50.02 -- is above $47.50 when these options stop trading, the puts will expire worthless, and yesterday's put sellers will keep the premium collected as profit. (The puts traded for a volume-weighted average price of $0.49 per contract.) Should LULU take a tumble and be trading below the strike price when the options expire, however, the put sellers could be assigned, and forced to buy LULU shares for $47.50 apiece, no matter where the stock is trading. While the theoretical purchase price is offset by the original credit collected, Lululemon premiums are relatively deflated at present. Schaffer's Volatility Index (SVI) of 32% for LULU is lower than 90% of similar readings taken over the past year.
It's been nearly a year since the upscale athletic apparel chain recalled a line of its yoga pants for being too sheer, and the company has subsequently struggled. Down roughly 26% during the last 12 months -- and off almost 40% since its mid-June peak of $82.50 -- Lululemon Athletica inc. (NASDAQ:LULU) has endured a management shakeup and reduced earnings results. While the stock was in recovery mode for much of February, it gapped lower on Friday amid negative remarks from a Credit Suisse analyst, and is now trading back below its 10-day moving average.