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Lululemon Athletica inc. (NASDAQ:LULU - 59.52) saw a rash of option activity throughout Thursday's session, with calls and puts both trading at accelerated levels. Traders may have been responding to unsubstantiated rumors that David Einhorn's hedge fund, Greenlight Capital, took up short positions in the stock. Regardless of the reason, roughly 19,000 calls and 45,000 puts crossed the tape, representing two and three times their respective average daily volumes.
Among the glut of puts that changed hands, the July 50 strike, as well as the 55- and 57.50-strike weeklies, emerged as the favorites. These puts were not used in a strictly bearish fashion, however, with most of the 50- and 55-strike contracts crossing the tape at the bid price. However, most of the 57.50-strike puts did change hands at the ask price, and open interest at all three strikes jumped overnight. In other words, LULU saw both sell-to-open, as well as buy-to-open, put activity yesterday.
Starting with the neutral-to-bullish short puts. By selling these puts to open, the options traders are betting on LULU to remain above the 50 and 55 strikes through their respective expirations (July 20 for the 50-strike puts, and end of day today for the weekly 55-strike puts). In these two best-case scenarios, the investors will pocket the maximum potential profit, or the initial premium paid. Conversely, the loss associated with selling a put is limited to the strike minus the initial premium collected, should the stock gap significantly lower in the short term.
On the flip side, other options players in yesterday's session weren't so optimistic about LULU's near-term price direction, and instead bought to open the weekly 57.50 puts. With this setup, the traders will begin to profit with each step south of $57.50 LULU makes by the time the closing bell sounds later this afternoon. The loss, meanwhile, is limited to the initial premium paid.
From a broader perspective, options players have held a bearish grudge toward LULU in recent weeks, as evidenced by data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). During the course of the past 10 trading sessions, speculators have bought to open nearly two puts for every call on LULU. Even more telling of the pessimism -- the stock's 10-day put/call volume ratio of 1.81 ranks in the 93rd percentile of its annual range, suggesting that bearish bets have been scooped up over bullish at a near annual-high clip.
Heading outside of the options arena, it appears that investors are siding with the put buyers, and have taken a skeptical stance toward the stock. Short interest swelled by 55.2% over the last two reporting periods, and now accounts for a lofty 16.8% of the equity's available float. In fact, short interest is currently perched at a 52-week peak.
On a technical basis, LULU has definitely felt the heat. The stock has backpedaled 20.3% over the past month, cutting into its healthy 27.4% year-to-date gain. The equity's chart troubles were exacerbated yesterday on the Einhorn-related rumors. LULU gapped 5.6% lower, but ended atop its 320-day moving average -- a trendline that has caught all pullbacks since July 2009.
Despite LULU's recent bout of negative price action, the stock has muscled 1.8% higher in today's session -- most likely prompting celebration for the weekly put writer, and concern for the weekly put buyer.