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Ulta Salon, Cosmetics, & Fragrance, Inc. (NASDAQ:ULTA - 74.00) last week issued earnings guidance for the first quarter that was far below what Wall Street analysts had predicted, and the option markets are still abuzz today after the weekend. Overall traffic for ULTA so far today is double the normal amounts, with both calls and puts trading at or near two times normal levels.
The most popular option so far has been the April 75 put. Given that 86% of the contracts are trading for the ask price, it's a strong possibility that at least some of these were purchased to open new positions. The volume-weighted average price (VWAP) was $3.39, meaning that ULTA shares need to drop 3.2% from their current levels to $71.61 (strike minus VWAP) by expiration day, April 19. Otherwise, the investors would lose their premium paid, but nothing more.
Given the reaction to Friday's earnings warning, such a decline may be possible. Ulta Salon, Cosmetics & Fragrance shares plunged 16% after the company predicted earnings between 60 and 63 cents a share, which is markedly lower than analysts' expectations of 72 cents a share. ULTA also had a similar drop of 11.7% in mid-February following the resignation of CEO Chuck Rubin. ULTA is barely breaking even today, even though the company announced a $150 million common shares buyback earlier this morning.
Longer-term sentiment in the option markets remains fairly bearish toward ULTA. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows that ULTA's 50-day put/call volume ratio stands at 1.52, and that is in the top 8% of readings over the last year. In other words, traders bought puts to open at a near annual-high rate over the last 50 days.