Lululemon Options Traders Bet On Another Earnings Swing

Lululemon Athletica is scheduled to report fourth-quarter earnings after tomorrow's closing bell

Mar 28, 2017 at 10:31 AM
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Yoga apparel maker Lululemon Athletica is slated to report earnings after tomorrow night's close. LULU stock has a volatile history of post-earnings moves, averaging a 10.8% swing over the past eight quarters, regardless of direction. In December, the shares surged 15% after Lululemon's earnings, while LULU racked up a 10.6% post-earnings loss in September. This time around, the options market is pricing in an 11.4% move for Thursday's trading session. Even with a negative earnings reaction for Finish Line stock, LULU options traders don't seem to be worried -- with speculators showing a growing appetite for long calls in recent weeks.

LULU Call Buying Picks Up the Pace

Specifically, options traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.34 calls for each put in the last two weeks. This top-heavy ratio ranks higher than 77% of all comparable readings taken in the past 12 months, meaning calls have been bought to open over puts at a faster-than-usual clip.

While it's noteworthy that this call-skewed backdrop comes amid near-annual-lows in LULU open interest levels, options traders who have been active have targeted the stock's weekly 4/7 70-strike call in recent weeks. In fact, this out-of-the-money strike has seen the biggest rise in open interest over the past 10 sessions, with 3,149 contracts added. Data suggests the bulk of the activity has been of the buy-to-open kind, meaning traders are betting on a breakout above $70 -- territory not charted since early January -- by expiration at next Friday's close.

It's Getting Expensive to Buy Short-Term LULU Options

Given that a healthy 9% of LULU's float is sold short, or 6.8 times the stock's average daily pace of trading, it's certainly possible that some of the recent call buying is a result of short sellers hedging against any post-earnings upside. Regardless, elevated volatility expectations are currently being priced into the stock's near-term options -- making it more expensive to buy premium. At last check, LULU's 30-day at-the-money implied volatility was docked at 41.3%, in the 76th percentile of its annual range.

LULU Stock Has Been Moving Lower Since Early December

Looking at the charts, LULU stock has been in a channel of lower highs and lows since its early December post-earnings bull gap. The stock hit an intraday high of $72.70 on Dec. 8, and has shed roughly 13% to hover near its current perch at $63.34. Nevertheless, Lululemon Athletica shares recently found a foothold in the $62.75 region, which corresponds to a 50% Fibonacci retracement of their surge from November 2015 to August 2016.

LULU stock daily trading chart march 28

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