Pre-Earnings Skepticism Ramps Up on Lululemon Athletica inc. (LULU)

Lululemon Athletica inc. (NASDAQ:LULU) will report earnings Wednesday morning

Mar 28, 2016 at 2:30 PM
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Yoga apparel maker Lululemon Athletica inc. (NASDAQ:LULU) is scheduled to unveil its quarterly earnings report ahead of the market open on Wednesday. The stock had negative earnings reactions following Lululemon's last two quarterly results -- averaging a loss of 14.8% in the session subsequent to LULU's reporting -- which may explain why put volume has been picking up speed.

Today, in fact, puts are crossing the tape at three times the expected intraday rate -- and outpacing calls by a nearly 3-to-1 margin. Most active are LULU's weekly 4/1 55- and 60-strike puts, due largely to two symmetrical blocks of 3,850 contracts that simultaneously crossed the tape earlier.

According to Trade-Alert, the activity here is most likely the result of one trader initiating a long put spread in the weekly series for an initial net debit of $700,700 (3,850 contracts * $1.82 premium paid * 100 shares per contract). Ideally, LULU will settle the week at $55 -- home to the sold strike -- a 9.3% slide from the equity's current perch at $60.67.

While this debit spread represents a moderately bearish outlook, it appears as if a number of traders have been more straightforward with their skepticism. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), LULU's 10-day put/call volume ratio of 0.96 ranks in the 69th percentile of its annual range.

What's more, the stock currently sports a Schaeffer's put/call open interest ratio (SOIR) of 1.42. Not only does this show that puts outweigh calls among options expiring in three months or less, but it ranks in the 88th annual percentile. In other words, short-term speculators are more put-heavy than usual toward LULU.

Meanwhile, with earnings on the horizon, it's not the most opportune time to purchase premium on LULU's near-term options. For starters, the stock's 30-day at-the-money implied volatility of 48.4% sits in the 79th annual percentile. Plus, LULU's Schaeffer's Volatility Scorecard (SVS) of 8 indicates the options market has tended to overprice the equity's ability to make big moves on the chart over the past year.

As touched upon, Lululemon Athletica inc.'s (NASDAQ:LULU) has turned in uninspiring technical performances following the firm's last two turns in the earnings confessional. Longer term, the shares have given back 13.3% since hitting an annual high of $70 on April 10, with recent rally attempts halted in the $63.50-to-$65 range.

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